The evolution of inflation
expectations in Japan

Masazumi Hattori and James Yetman
Hitotsubashi University Policy Forum on“Inflation: theory and reality”, 17/2/2017

Disclaimer: the views expressed here are not necessarily shared by the BIS

Inflation forecasts from Consensus….
 Lots of horizons

 Updated every month Forecasts of current and following calendar years
 Lots of forecasters

 20-30 each month What’s the best way to model / think about these?

2

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Forecasts of inflation across horizons
Forecaster 10

Graph 2a
Forecaster 12

Forecaster 16

Each line shows forecasts of a given inflation outcome at different horizons. The horizontal axis shows the forecast horizon, eg “24” indicates
forecasts made 24 months before the completion of the calendar year being forecast. The vertical axis is measured in percentage points.
Source: Authors’ calculations.

5US forecaster 5

US forecaster 12

US forecaster 19

US forecast 29

Canadian forecaster 7

Canadian forecaster 10

Canadian forecaster 16

Canadian forecaster 18

6Modelling consensus inflation forecasts….

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Weibull decay functions

Graph 2Estimated α (h)Note: Horizontal axis represents the forecast horizon h, which is the number of months before the end of the calendar year being forecast.

8Modelling consensus infaltion forecasts…. (II)9

First step: constructing “forecasters”
Combine if: there is plausible evidence that the underlying entities are thesame, via corporate websites, news stories or elsewhere; and the timing of the name change lines up with the departure andarrival of the associated names from the panel.
Split:
 considerable break with no forecasts

Drop if: panel is too short or incomplete

10Forecasters
1

Bank of Tokyo
10/1989-03/1996
2 CS First Boston
10/1996-04/1998
3 Dai-Ichi Kangyo Bank
10/1989-07/1997
4 Daiwa Securities Research
10/1989-11/1992
5 Deutsche Securities
05/2000-12/2015
6 Econ Intelligence Unit
11/2003-12/2015
7 Global Insight
11/2003-10/2008
8 Goldman Sachs
05/2000-12/2015
9 HSBC
06/2000-12/2015
10 Industrial Bank of Japan
10/1989-07/2000
11 ITOCHU Institute01/2003-12/2015
12 Japan Ctr for Econ Research
10/1989-12/2015
13 JP Morgan - Japan
10/1992-11/2015
14 Long Term Credit Bank
10/1989-06/1998
15 Merrill Lynch - Japan
10/1989-12/2015

Table
Bank of Tokyo Mitsubishi
Bank of Tokyo-Mitsubishi UFJ
08/1996-06/2006
07/2006-12/2015
Credit Suisse First Boston
Credit Suisse
08/1998-01/2006
02/2006-12/2015
Dai-Ichi Kangyo Rsrch Institute Mizuho Research Institute08/1997-03/2002
04/2002-12/2015
Daiwa Institute of Research
12/1992-12/2015

IHS Global Insight
11/2008-12/2013

IHS Economics
01/2014-12/2015

LTCB
08/1998-05/2000

Shinsei Bank
06/2000-12/2002

Source: Consensus Economics; Authors’ calculations.

11Forecasters
16 Mitsubishi Research
10/1989-02/1996
17 Nikko Research Center
10/1989-02/1999
18 Nippon Credit Bank
10/1989-05/1997
19 NLI Research Institute04/1996-12/2015
20 Nomura Research Institute10/1989-04/2005
21 S G Warburg - Tokyo
10/1989
22 Salomon Brothers Asia
04/1996-12/1997
23 Sanwa Research Institute04/1996-03/2002
24 Smith Barney - Tokyo
09/1994-11/1997
25 Sumitomo Life Rsrch Institute12/1990-03/2005
26 Tokai Bank
10/1989-09/2001
27 Toyota Motor Corporation
10/1989-12/2015
28 Yamaichi Research Institute10/1989-11/1997

Table
Mitsubishi Research Institute01/1997-11/2015
NCB Research Institute06/1997-04/2000
Nomura Securities
05/2005-12/2015
S G Warburg - Japan
11/1989-09/1995
Warburg Dillon Read - Japan
11/1998-10/1999
Salomon Smith Barney Asia
02/1998-03/1998
Nikko Citigroup
04/2003-06/2010
UFJ Institute04/2002-12/2005
Smith Barney - Japan
10/1989-10/1993

SBC Warburg - JapanLTCB Warburg - Japan
11/1995-05/1998
06/1998-07/1998
UBS Warburg
UBS
06/2000-05/2003
06/2003-12/2015
Salomon Smith Barney
Nikko Salomon Smith Barne
04/1998-02/1999
03/1999-03/2003
Citigroup Global Mkts Japan
Citigroup Japan
07/2010-04/2012
05/2012-12/2015
Mitsubishi UFJ Research
03/2006-12/2015
Smith Barney Shearson - Tokyo
11/1993-08/1994

Source: Consensus Economics; Authors’ calculations.

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Japanese inflation anchors
In per cent1

Graph 4

Rolling sample.

Source: Authors’ calculations

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Japanese inflation anchors: robustness checks
Mean anchor estimate and 95%
confidenceStandard deviation of estimates

Graph 5Median anchor estimate and interquartile rangeInter-quartile range of anchor estimates

From the left: the first column contains the average estimated inflation anchor and 95% confidence band across all forecasters for each rolling sample. The second column contains the standard deviation of
estimated inflation anchors. The third column contains median estimated inflation anchors and inter-quartile ranges. The final column contains inter-quartile ranges.
Source: Authors’ calculations.

14Estimated US inflation anchors
Mean and 95% confidence bands

Graph 3Per cent

Japanese inflation anchors
In per centGraph 4

Source: Author’s calculations.

Estimated Canadian inflation anchors
Mean and 95% confidence bands

Graph 5Per cent1

Rolling sample.

Source: Authors’ calculations

Source: Author’s calculations.

15What explains the cross-country difference?
Canada: Adopted inflation target in January 1988
 Target renewed repeatedly (’93,’98,’01,’06,’11) with minorchangesUS: Multiple targets (“maximum employment, stable prices, andmoderate long-term interest rates”) but increased clarity about
importance of inflation over time Precise objective for long-run inflation first announced January2012; updated annually since
Japan:
 Explicit target beginning January 201316

Japanese α(h): median and inter-quartile range for different values of hGraph 6h=24h=20h=16h=12h=8h=4Source: Authors’ calculations.

17Estimated weight on inflation anchor for US forecasters, 𝛼𝛼(ℎ)

h=24h=20h=12h=16h=12h=4h=8h=4h=24h=20h=16h=8

Source: Author’s calculations.

Graph 7Estimated weight on inflation anchor for Canadian forecasters, 𝛼𝛼(ℎ)

Graph 8Source: Author’s calculations.

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Estimated decay paths by forecasters

Graph 7α(h) 1989-1998

α(h) 1997-2006

α(h) 1998-2007

α(h) 1999-2008

α(h) 2003-2012

α(h) 2006-2015

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US estimated decay paths by forecaster

Graph 9 Canadian estimated decay paths by forecaster1989-1998

1989-1998

1996-2005

1996-2005

2004-2013

Graph 10

2004-2013

Forecaster numbers correspond to Table 1.

Forecaster numbers correspond to Table 2.

Source: Author’s calculations.

Source: Author’s calculations.

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Japanese inflation anchors: by type of forecaster
Mean anchor estimate and 95%
confidenceStandard deviation of estimates

Graph 8Median anchor estimate and interquartile range

Inter-quartile range of anchor estimates

From the left: the first column contains the average estimated inflation anchor and 95% confidence band across all forecasters for each rolling sample. The second column contains the standard deviation of
estimated inflation anchors. The third column contains median estimated inflation anchors and inter-quartile ranges. The final column contains inter-quartile ranges.
Source: Authors’ calculations.

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Adjusting for tax hikes:
 Use assumptions from BoJ (2012, 2013a, 2013b, 2014) on effectof tax hikes to adjust forecasts and actuals

Subtract expected
effect of taxes afterAnnouncement fromforecasts

Subtract estimatedeffect of taxes fromactuals

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Japanese inflation anchors: tax adjustment
Mean anchor estimate and 95%
confidenceStandard deviation of estimates

Graph 9Median anchor estimate and interquartile range

Inter-quartile range of anchor estimates

From the left: the first column contains the average estimated inflation anchor and 95% confidence band across all forecasters for each rolling sample. The second column contains the standard deviation of
estimated inflation anchors. The third column contains median estimated inflation anchors and inter-quartile ranges. The final column contains inter-quartile ranges.
Source: Authors’ calculations.

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Conclusions
 Many changes in the role of CPI inflation in BoJ policy overrecent decades (documented in paper).
 What effect on inflation expectations anchoring?

 Estimated anchors declined early in sample, remained close
to zero 1996-2005 to 2004-2013, and then rose Diversity of anchors across forecasters also rose in recentsamples
 Interpretation:

 Some success in unanchoring expectations from previous
low levels and raising anchor point?
 c.f. Canada (& US): expectations only weakly anchored24