The Effect of High Food Inflation on Inflation Expectations
This study analyzed the recent high food inflation in Japan (excludingrice prices) in terms of its mechanism and effects on inflation expectations (IEs). Thefollowing three issues were identified. First, even when soaring rice prices are excluded, it is observed that food prices, generally, have been rising higher thanheadline inflation rates, driven by such goods as confectionary and drinks. Such high food inflation was supported by tightening supply/demand conditions,decrease in food inventories, and firms’ positive attitudes towards price hikes. Second, food prices exert relatively larger influence over IEs compared to otherconsumption items. Third, increases in food prices tend to boost IEs in a non-liner manner so that large price increases accelerate IEs. The above findingssuggest that food prices will continue their upward trend unless excess demand conditions improve. Furthermore, central banks should carefully examine thedevelopment of food prices when formulating monetary policies, as many central banks now focus on core inflation rates, which often exclude food prices tomitigate short-term or temporary price fluctuations
The Unique Features of Japan's Inflation Expectations of Households and Firms during the Current InflationaryPeriod
This study compared inflation expectations (IEs) of Japanese households and firms against those of major advanced countries at the end of 2024, when surgesin inflation rates subdued in overseas economies. In many advanced countries, the following facts were observed: (1) peak-rates of inflation reached 5 to 8 %,(2) after peaking out, both inflation rates and IEs converged to approximately 3 %, (3) long-run IEs remained relatively stable during the inflationary period. Thedevelopments in Japan’s IEs were as follows: (1) oneyear-ahead IEs of households reached 10%, which was more than double the amount of CPI increaserates, (2) five-year-ahead IEs also reached 5% at theirpeak level, (3) firms’ IEs were more restrained than those of households, and (4) both the short- and long-term IEs of households and firms remained elevated even after the CPI peaked. Compared to the IEs of other advanced countries, Japan’s IEs showed uniquefeatures, such as that (1) no other countries besides Japan experienced one-year-ahead IEs substantially exceeding the CPI and marking the highest value amongthe advanced countries, (2) unlike most advanced countries, Japan’s IEs have not converged to approximately 3 % level, (3) Japan’s five-year-ahead firm IEscontinued an increasing trend at the end of 2024. Such unique features of Japanese IEs seemed to be related to remaining at a high level of the CPI and to thelarger upward bias of Japanese households’ IEs compared to other countries. Thus, this require continued close monitoring.
Heterogeneity of Households inflation expectations
This study analyzed the heterogeneity of household inflation expectations (IEs) and showed that the perfect rational expectations do not hold for household IEs.Under perfect rational expectations, household IEs converge to the same level regardless of various socioeconomic attributes because IEs reflect all of theavailable information. However, household surveys revealed that IEs vary significantly depending on households’attributes, which contradict perfect rationalexpectations. IEs vary according to socioeconomic attributes as follows: (1) Men’s IEs are generally lower than those of women, (2) the higher the income is,the lower the IEs, (3) the higher the educational level is, the lower the IEs, (4) pensioners and the unemployed showed high IEs, and (5) the relationship betweenage and IEs is mixed, although in Japan, both are positively correlated. The heterogeneity of IEs has significant implications for central banks’ policycommunications with the general public. To increase the efficiency of the communication, central banks should target groups with relatively high IEs, includingwomen, low-income groups, those with a low educational background, and, in the case of Japan, older adults.
Japanese Households' Inflation Attention Thresholds
This study analyzed the rational inattention hypothesis where households’inflation attention become responsive to inflation rates once they exceed a thresholdlevel. Using a threshold model, the following three points were found.First, data derived from the Google Trends analysis of the keyword “inflation” were asuccessful alternative indicator for households’ inflation attention level. A threshold level was found to be +3.0 percent for the U.S. and +1.5 percent for Japan.In Japan, the sampling period needed to include the current inflationary phase, since the economy suffered from a prolonged period of low inflation. In addition,the word “price” in Japanese yielded much more stable threshold level than using “inflation” or “infure.” (a Japanese word equivalent to “inflation” in the U.S.). Second, threshold levels were calculated for 21 countries. Except for Switzerland and Japan, most developed countries’ threshold levels were within therange of +2.5% to +3.5%, which were slightly above the central banks’inflation target (2 percent or 1-3 percent). High correlations were found between thethreshold levels and average inflation rates during the sample period, not only among developed countries but also among developing countries with highinflation rates. Third, to check the robustness of the above estimation, threshold levels were estimated by alternative data derived from the share of “don’tknow” answers contained in household inflation expectations surveys. The resulting threshold levels were consistent with the Google Trends analysis. Lastly,the existence of the threshold levels has implications for monetary policy such as flattening Phillips curve during low inflation periods.
Japanese Firms’ Inflation Expectations during the Current Inflationary Phase
This study analyzed Japanese firms’ inflation expectations (IEs) and their formation mechanism during the current inflationary phase.
First, analyzing Tankan data revealed that Japanese firms’ IEs moved around 1 percent before the pandemic. This rose to 3 percent for one-year-ahead andabout 2 percent for five-year-ahead expectations during the current inflationary period. Larger firms showed lower IEs than smaller ones. Furthermore, firms'IEs lie between those of households and professionals.
Second, firms’ IE formation mechanism is neither perfectly rational nor adaptive. Firms are irrational due to (1) the wide dispersion of IEs reflecting the size offirms and (2) upward bias against actual CPI. Simultaneously, firms show rational behaviors, such as assigning higher priority to monitoring IEs, when actualinflation soars. Rational inattention (RI) theory became a useful framework for explaining such seemingly inconsistent firms’ behaviors. RI assumes that firmsintentionally and rationally ignore the information which have relatively small value for the their activities.
Third, Japanese firms' IEs are not anchored at the 2 percent inflation target.Even the longer-term IEs, such as three- and five-year-ahead ones, have clearlyincreased during the current inflationary phase. Similar patterns are observed in the U.K., Italy, and other major developed countries.
Since data and studies on firms’ IEs are limited, further research challenges include accumulating related data and analyzing the formation mechanism of IEs.
Japanese Households' Inflation Perceptions: The Formation Process and Their Relationship with Inflation Expectations
This study examined the formation process of household inflation perceptions as well as their relationship with inflation expectations and implications formonetary policy implementation. Inflation perceptions attracted relatively little attention until recently because they had constantly exceeded the actual CPI andwere considered unreliable. This attitude has changed as inflation perceptions became considered the
basis for forming inflation expectations. At the same time, the following reasons are offered to account for the inflation perceptions constantly exceeding theCPI. The first is a lack of households’ basic knowledge regarding the CPI. The second is people’s tendency toward loss aversion. The third is households’lack of awareness of the CPI’s quality adjustments. Regarding the relationship between inflation
perceptions and expectations, the following evidence was found. First, socioeconomic attributes of consumers affect both inflation perceptions andexpectations in the same way. Second, according to household surveys, households heavily rely on inflation perceptions when responding to inflationexpectations. Third, crosssectional analysis using individual sample data shows strong correlations between
the inflation expectations and perceptions. Such features of inflation perceptions have monetary policy implications. First, although food and gas prices areexcluded from the “core-core CPI,” they should be monitored closely. Second, differences in inflation expectations caused by socio-economic attributesdistort efficient resource allocation. Third, households’ financial literacy should be improved. Future
challenges in this field include further data accumulation, which enables detailed studies on the formation process of inflation perceptions
Instability of Japanese Household Inflation Expectations During the Current Inflationary Phase
This study analyzed Japanese household inflation expectations during the current inflationary phase and concluded that they are relatively unstable comparedwith those of European and U.S. households. Japanese household inflation expectations show certain unique features. First, they consistently move above theConsumer Price Index (CPI) and closely follow the movement of CPI, especially in the case of one-year-ahead expectations. Second, during the currentinflationary phase, inflation expectations suddenly became unstable, since they rose to +10 percent for one-year-ahead expectations and +5 percent for five-years-ahead expectations. Both expectations exceeded the actual CPI at the time. Third, although the peak level of CPI was lower in Japan than in the U.S. andEuropean countries,Japanese inflation expectations were significantly higher than other countriesduring the current inflationary phase. The contrast is especiallyremarkable in thecase of five-years-ahead expectations, where those of the U.S. and European countries were barely affected by the rises in CPI. Furtheranalysis on the stability
of Japanese inflation expectations in different economic circumstances is required, such as an examination of the mechanisms behind household inflationperceptions,since these are closely related to inflation expectations.
Japanese Households' Financial Asset Allocation: A Critical Study of the Government's Asset Relocation Policy
This study critically analyzes the Japanese government’s policy to shift households’ financial assets from bank deposits toinvestment instruments. There arethree points for discussion; (1) whether U.S. households’ allocation pattern should beused as a benchmark,(2) the effects of long-term stagnation of theJapanese economy on households’ asset accumulation,and (3) the macroeconomic impact of asset relocation. Regarding the first point, the financial assetallocation patterns of U.S. households are severely affected by the top 5 percent asset group, whose risk-asset ratio is significantly higher thanaveragehouseholds. Therefore, great caution should be exercised when using the U.S. allocation pattern, derived from theaggregate household financial assets, as abenchmark for policies aimed at relocating Japanese households’ financial assetstoward risky assets. Regarding the second point, the growth rate of Japanesehouseholds’ financial assets are distinctlylower than that of U.S. households. This is mainly owing to long-term stagnation of the Japanese economy andsluggish stockprices. Additionally, the low risk-asset ratio among the Japanese younger generation is not caused by their risk aversion, butmainly because ofliquidity constraints resulting from holding risky nonfinancial assets, such as real estate. Regarding thethird point, the corporate sector remains a fund-surplussector in Japan. This implies that its growth is not hampered byliquidity constraints and that shifting households’ bank deposits to risky assets will notaccelerate the Japanese economy’sgrowth rate. Conversely, as the economy grows faster, households will spontaneously increase investments in risky assetsasdisposable income increases and liquidity constraints are relaxed.
Application of Behaviral Economics to the Central Bank's Communication with the General Public
Until recently, the central bank’s main target for policy communication was financial professionals. However, major centralbanks have begun direct policycommunication with the general public. The objective of such movements is to stabilize publicinflation expectations to increase the effectiveness of monetarypolicy and improve the credibility of central banks. Thelatter’s communication with the general public has generated new problems, such as how to attract thepublic’s attentionwhen most of them are indifferent to policy communications and how to support the public’s understanding of policycommunication. Thisstudy proposes applying behavioral economics to cope with such problems, which are closely related tothree behavioral biases: information overload, myopicbehaviors, and overconfidence. Reducing the volume of informationprovision, decreasing the difficulty of the content, and changing the design of banks’websites are required to offsetinformation overload. Incentives are needed to restrain myopic behaviors. These include utilizing “teachable moments”andemphasizing “relativity.” Countermeasures for overconfidence include encouraging citizens to take a mini quiz.
Gender Gap in Financial Literacy: A Case Study of Japan
This study discussed the gender gap in financial literacy in Japan. Specifically, we proposed two questions, as given below.(1) Why is the gender gap observed?(2) What are the implications of gender gap for Japanese women? Regarding the firstquestion, there is no clear consensus about the reasons for the gender gap,inside and outside Japan. A widely shared viewamong experts is that “no single factor can explain the phenomena and further investigation is warranted.” Thisis due tofact that socio-demographic factors have only limited statical explanatory power, and that a significant number of conflictingevidences have emergedagainst the division of housework load hypothesis. An alternative hypothesis is the effects of socialconventions, which seem to work but are not easy to convertto economic data.Regarding the second question, this studystressed the Japanese women’s need for a higher level of financial literacy. As the average life-expectancy of women islonger than that of men, women need a larger amount of financial assets than men do, despite lower income and pensionbenefitscompared to men. In addition to the gender gap in financial literacy, Japanese women showed (1) low self-assessment of their financial literacy; (2) low-confidence in financial transactions; and (3) better financial attitudes/behaviors compared to men, despite the low level of financial knowledge.To close thegender gap in financial literacy inJapan, financial education, particularly designed for women, should be promoted. For this purpose, there is a strong needtoshare the gender gap issue with women and those participating in financial education, and to further investigate the reason.