Silviase/jgov_v1.4_full_ann huggingface dataset:
original data set to address the following three issues.

First, we use the Monitor’s household-level data, which asked the respondents about their price expectations, to estimate price expectations. By averaging price expectations among respondents, we directly calculate average price expectations, without relying on strong assumptions. The calculated average price expectation series itself contains new information and may serve as a useful input for the design of monetary policies.

Second, we examine the factors that may affect price expectations. Since the Monitor’s survey tracks the same households repeatedly, the panel structure of the data enables us to identify the factors that may affect price expectations. The survey contains numerous questions about household responses to changes in monetary policies, such as introduction of quantitative easing, and responses to some exogenous shocks such as the outbreak of the Iraq War. The wide variety of questions in the Monitor survey thus enriches our analyses of price expectations.

Third, we address the consequences of a change in price expectations on household behavior. We will focus especially on the effect of price expectations on household consumption and savings. Deflationary expectations may loosen the budget constraints of households by increasing real income and stimulating consumption. On the other hand, if a household expects that deflation will continue in the future, the increase in real interest rates may deter the purchase of durable goods. Moreover, if a household combines deflationary expectations with anxiety about future business or employment conditions, deflationary expectations might discourage current consumption in general. Thus, empirical studies are needed to determine the directions in which price expectations may affect household consumption.

This paper is organized as follows. The next section reviews some related literature on price expectations in Japan. The third section describes the “Kokumin Seikatsu Monitors” and the data set used in this paper. We calculate quarterly average price expectations based on the micro-level data from the Monitor. The fourth section examines what changed price expectations, focusing on exogenous shocks such as monetary policies or changes in the international
environment. The fifth section evaluates how changes in price expectations affected household consumption. The final section concludes and discusses some policy implications drawn from our empirical analysis.

### 2. PRICE EXPECTATION MEASURES IN JAPAN

In striking contrast to countless studies on inflation, there have been relatively few studies of deflation in Japan until recently, partly because Japan had limited experiences with deflation in the past. If we widen our scope of studies to price expectations in general, there are several strategies of research that have been proposed to measure price expectations.

The first strategy is to use inflation indexed bonds. This approach utilizes information from markets (see Kitamura, 1997, 2004), and the NIKKEI QUICK that started to provide price expectation series based on bond prices from the end of June 2004. $ ^{2} $ However, since an indexed bond issue in Japan was initiated in the March 2004 for the first time, we cannot therefore utilize the indexed bond information for longer periods.

The second strategy is to employ the expectation-augmented Phillips curve to derive a price-expectation series. Although this strategy was widely adopted in US studies, where the estimated Phillips curve works well, Fukuda and Keida (2003) reported that the curve did not fit Japanese data well. $ ^{3} $

The third and the most popular strategy in Japan is application of Carlson and Parkin (C-P) (1975), which derives an inflation expectation series using actual inflation and published aggregates from a survey of individual economic agents. $ ^{4} $ Although the C-P method needs information only on the directions of price expectations, it depends heavily on strong assumptions, such as normally
distributed expectations, whose reality has never been seriously examined. Hori and Shimizutani (2003) concluded that the normality assumption, the core of the C-P method, is violated in Japan, using the same Monitor data set as in the present paper.

The last and most obvious strategy is to directly ask respondents about their price expectations in a survey. Although this straightforward strategy has a long history in the United States, such as in the University of Michigan “Survey of Consumers” and the “Livingston Survey” of professional economists, and many US studies have examined price-expectation formation using these survey data, $ ^{5} $ it has not been seriously considered in Japan.

Since we believe the lack of a survey that directly collects price expectations has seriously hampered studies on price expectations in Japan, we will adopt a fourth strategy using a consumer survey approach, though it is still in the experimental stage. We hope that our survey based micro-level data set will further encourage research on Japanese price expectations.

### 3. DATA

The analyses of this paper utilize micro-level data from the “Kokumin Seikatsu Monitors” (Monitor). The Price Division of the Cabinet Office has monitors who ask timely questions about current policy issues related to price stability and national lifestyle. The sample size is about 2,400 for each survey and is allocated to each prefecture in proportion to its population size. $ ^{6} $ The sample is not randomly chosen; each prefecture publicly recruits voluntary respondents, paying attention to unbiased distribution in age, employment, and regions in each prefecture. $ ^{7} $ The voluntary use of monitors motivates respondents to answer each survey to the best of their ability and results in the unusually high response rate of more than 90 percent.
The questions related to price expectations were included in the Monitor survey twelve times between the second quarter of 2001 and the first quarter of 2004. $ ^{8} $ A monitor household is surveyed quarterly (March, June, September and December 1 $ ^{st} $ ). Although some households are dropped from sample after one fiscal year, most of them remain in the sample in the following years, which enables us to construct a longer panel.

A notable feature of our Monitor data regarding price expectations comes from the fact that respondents are asked not only the directions of changes, which all other consumer surveys in Japan focused on, but also the size of changes in figures. By averaging the individual figures, we can directly derive the price expectation series without relying on any strong assumptions.

Apart from the basic questions that are illustrated in the next section, price-related questions cover the effect of changes in monetary policies (i.e., quantitative easing) and other exogenous shocks, such as the Iraq War, on price expectations. Income related questions cover employment and social security system uncertainties. Consumption related questions ask concrete reasons for increases or decreases in consumption for the past year and the next year. Debt related questions ask the burden of loan repayments out of monthly salary and the effect of deflation on debt burdens.

Further, the Monitor survey covers detailed information on household characteristics such as head of household age, sex, employment status (industry if employed), residential status, family size, and annual income level. The basic statistics of the surveyed households are summarized in Table 1. The average age of the head of household, i.e., respondents or their spouses, is around 50. The average annual income is around 5.5 million yen, and about 90 percent of the survey respondents were female.

### 4. AVERAGE PRICE EXPECTATIONS AMONG JAPANESE HOUSEHOLDS

In this section, we first calculate price expectations from the Monitor household-level data.
The exact wordings of the questions related to price expectations in the Monitor are as follows. Similar questions and answers are also provided for the perceptions of current prices compared with the previous year prices (henceforth, “current price”).

(A) “During the next 12 months, do you think that prices of goods and services that you frequently purchase on a daily basis will go: (1) up, (2) remain the same, (3) down, or (4) uncertain?”

(B) “If you answered ‘up’ or ‘down,’ how much (in figures) do you think the price level will change during the past 12 months?”

(C) “If you cannot provide an actual number, please select from the following choices:

(1) less than 20 percent

(6) plus 0 percent to plus 2 percent

(2) minus 10 percent to minus 20 percent

(7) plus 2 percent to plus 5 percent

(3) minus 5 percent to minus 10 percent

(8) plus 5 percent to plus 10 percent

(4) minus 2 percent to minus 5 percent

(9) plus 10 percent to plus 20 percent

(5) minus 0 percent to minus 2 percent

(10) more than 20 percent.”

In what follows, we confine our sample to those who responded in actual figures, that is those who chose (2) in (A) or selected (1) or (3) in (A) and answered in (B). $ ^{9} $ Figure 1 shows the estimates of average price expectations based on the survey. Price expectations range from minus 0.2 percent to zero percent in 2001 and 2002. However, there is a sizable increase to 1 percent in the first quarter of 2003, followed by a decline to 0.2 percent in the second quarter and a steady increase toward the first quarter of 2004, which reached 0.8 percent. In contrast, the perception of current price was around minus 1.3 percent until the first quarter of 2002 and then gradually approached zero. Finally, it turned to positive in the last quarter of 2003 and reached one percent at the beginning of 2004. We should note that perception of current price closely follows the development of the CPI (bold line in the figure). That is, responses capture the actual trend in the
price developments quite well. We also observe that perception of current price is always lower than the price expectation. This might reflect that household price expectations always have an inflationary bias. $ ^{10} $

In sum, we observed that deflationary expectations ranged from minus 0.2 percent to zero percent in 2001 and 2002. However, the deflationary trend was suspended by a rise in expectations up to 1 percent in the first quarter of 2003. Although a decline to 0.2 percent increase in the second quarter makes the foregoing increase temporal, price expectations increased steadily to 0.8 percent to terminate the deflationary movement by the first quarter of 2004. Perception of current price, which mimics the developments of the aggregated CPI, was lower than the estimated price expectations all the way. This may suggest that household price expectations have an inflationary bias.

### 5. THE FACTORS THAT AFFECT PRICE EXPECTATIONS

Given the new measure of price expectations, we now turn to our second question, that is, what changes price expectations. More concretely, we focus on the effects of exogenous shocks such as monetary policies and changes in the international environment on price expectations. The panel structure of our data set enables us to investigate the formation of price expectations after controlling for the heterogeneity in households. Before running regressions to test what determines price expectations, we preview some important factors that are plausibly related to the formation of expectations.

First, price expectations should naturally depend on lagged expectations and current actual price developments. The correlation coefficient between price expectations and lagged expectations is 0.3, suggesting some inertia of price expectations; once deflationary expectations are generated, we observe that those expectations last for some time. The correlation between price
expectations and perception of current price movements is 0.5. This may reflect an adaptive aspect of household behavior in their expectation formation.

Second, income expectations or current income also may affect price expectations. The questions related to income have exactly the same structure as those of the price related questions explained above, including the multiple choices. Figure 4 describes the series on current income and income expectations. As can be seen, both of them have ranged from minus 1.5 to minus 3 percent. We should note that there is no “jump” in income in the first quarter of 2003 when a rise in price expectations is observed. In this sense, we cannot explain the increase in price expectation by income (or business condition) factors.

Third, we can consider the impacts from exogenous shocks including policy changes. Fortunately, the Monitor survey contains many questions about monitors' responses to changes in monetary policy or to exogenous shocks such as the outbreak of the Iraq War.

Table 2 briefly summarizes the recent developments in Japanese monetary policy. Notably, the Bank of Japan has performed “quantitative easing” to increase the money supply to combat deflation since March 2001. The policy includes: (1) a change in the operating target of money market operations; (2) CPI guidelines for the duration of the new procedures; (3) an increase in the current-account balance at the Bank of Japan and declines in interest rates; and (4) an increase in outright purchases of long-term government bonds. The policy target was revised to expand in August, September and December, including a reduction in the official discount rate from 0.15 to 0.10. In 2002, the Bank began to consider a new policy package to purchase stocks directly from the market in September, and the operating target was revised again in October. The Bank began to examine the possible purchase of asset-backed securities and the operating goal was revised in April, May, and October 2003 and also in January 2004. These policies were new and indicated a regime change in Japanese monetary policy. However, as far as we know, there are no other studies that have seriously examined household reaction to those policy changes.
Figure 5 summarizes household responses to the monetary policy questions in the March 2002 Monitor survey. First, about half of the respondents knew about the policy. $ ^{11} $ However, out of those who were aware of the policy, the share of respondents who revised their price expectations was less than 10 percent. More than 60 percent answered there was no effect on their expectations and approximately 30 percent answered that they were not sure of the effects. Further, the survey asked the reasons for not reacting to the policy changes. About half of respondents answered that the quantitative easing policy cannot affect the economy, and about 10 percent answered the scale was too small; the remaining 40 percent answered that they did not understand the mechanism for the policy to work.

The Monitor survey also asked the respondents about their reactions to other types of exogenous shocks, such as the September 11th terrorist attack and the outbreak of the Iraq War, as reported in Figure 6. Regarding the September 11th attack, only 10 percent of respondents raised their expectations, roughly 40 percent did not change their expectations, and 20 percent lowered their expectations, probably according to their respective anticipation of future developments. On the other hand, the Iraq War raised the price expectations of more than half of the respondents, which is greater than in the cases of the monetary-policy change.

Based on our previews of factors to explain price expectations, we have run regressions with the following specifications to examine the relative importance of those factors:

$$ \begin{aligned}\boldsymbol{P}^{e}{}_{i,t+1}=&\boldsymbol{\alpha}_{0}+\boldsymbol{\alpha}_{1}*\boldsymbol{P}^{e}{}_{i,t}+\boldsymbol{\alpha}_{2}*\boldsymbol{P}_{i,t}+\boldsymbol{\alpha}_{3}*\boldsymbol{Y}_{i,t}+\boldsymbol{\alpha}_{4}*\boldsymbol{M}_{t}+\boldsymbol{\alpha}_{5}*\boldsymbol{X}_{t}\\&+\boldsymbol{\alpha}_{6}*Macro_{t}+\boldsymbol{\alpha}_{7}*Z_{i,\mathfrak{t}}+\boldsymbol{\varepsilon}_{i,t}\end{aligned} $$

where $ P_{i,t+1}^{e} $ is a household’s price expectation for time $ t+1 $ , i.e., a quarter ahead. $ P_{i,t} $ is the current price change and $ Y_{i,t} $ is the current income change, both of which are perceived by a respondent household. A vector $ Macro_{t} $ contains the oil-price change and a composite index, or dummy variables for each quarter to control for macroeconomic factors. Another control vector, $ Z_{i,\tau} $ ,
includes the age and squared age of head of households and the logarithm of annual household head income in fiscal year $ \tau $ . $ ^{12} $ The last notation is an error term.

Our main interests are the coefficients on $ M_{i,t} $ and $ X_{i,t} $ . $ M_{i,t} $ is a monetary policy related dummy variable at time t that takes two different forms: a dummy for those who knew each change in monetary policy right after those events (henceforth, “Knowledge Dummy”) and for those who actually revised their expectations (henceforth, “Revision Dummy”). As regards the “Knowledge Dummy”, the survey asked the respondents whether they knew the changes in monetary policy such as the four times implementation of quantitative easing in 2001. We allocated one for the respondent households if they answered they knew a policy change. $ ^{13} $ “Revision Dummy” takes one if a household changes its expectations in response to a certain policy change. $ X_{i,t} $ , is a vector of dummy variables that corresponds to other exogenous shocks such as the September 11th terrorist attack in 2001 and the outbreak of the Iraq war in 2003. The dummies take one for respondents who revised their expectations in response to the exogenous shocks. $ ^{14} $

Table 3 reports the regression results only with the “knowledge dummy.” We may first note that the coefficients both on current price and on lagged price expectations are positive and significant. In other words, price expectations had some elements of inertia of expectations and adaptive formation. On the contrary, the estimated coefficients on current income are not significant in most cases and are much smaller than those on price factors. $ ^{15} $

Although the above findings are suggestive for our understanding of expectation formation, what interests us most is the fact that the coefficients on the “Knowledge Dummy” are not significant in all cases of cross section regressions (columns <1> to <4>) and panel regressions (<5> and <6>). Consistent with the previews on household responses to policy changes reported in
Figure 5, this finding implies that the knowledge of the implementation of policy changes does not necessarily lead to changes in price expectations. In other words, although about a half of all respondent households knew the regime change in monetary policies, they did not alter their expectations in response to their knowledge.

On the other hand, Table 4 shows the results based on the “Revision Dummy” for monetary policies and other exogenous shocks. The households in these regressions are those who knew the changes in monetary policies and answered to have raised their price expectations; and thus the coefficients on those dummies are expected to be positive and significant. We ran the “Revision Dummy” regressions to measure how much price expectations were revised in response to policy changes.

The cross-section results in Table 4 confirm our findings in Table 3 on the relative importance of current price changes, lagged price expectations and current income changes in the formation of price expectations. Moreover the estimated coefficients on the “Revision Dummies” in response to each monetary policy announcement are positive and significant, though the magnitude of those policy impacts decreases as time changes. To our surprise, the noticeable change of the BOJ governor (from Mr. Hayami to Mr. Fukui) raised price expectations of respondents only insignificantly. In contrast, the coefficients on dummy variables of the September 11th terrorist attack and of the Iraq war are significantly positive.

Table 5 reports the results of panel regressions that pool the cross-section data after controlling for macroeconomic variations. Most of our findings based on the cross-section regressions above are reconfirmed in these panel regressions. First, the coefficients on the “Revision Dummy” at the introduction of quantitative easing (in March 2001) are significant and large with a magnitude of 0.8 - 0.9 percent point. At the second and third episodes of quantitative easing in August and September 2001, the estimated coefficients decline to about 0.3 - 0.4 percent, although they are still statistically significant in general. The coefficients on “Revision Dummies” in the later episodes are not significant, however.
If we focus on the effects of monetary policies other than quantitative easing, the effects of the purchase of asset-backed securities were significantly positive in most cases. However, we see no significant effects in the new initiative toward financial system stability or in the change of governor from Mr. Hayami to Mr. Fukui.

As regards other exogenous shocks, the coefficients on the September 11th attack and the Iraq war are positive and significant with coefficients of 1.2 to 1.5. An interesting finding from our regression exercises is the coefficient on the time dummy for the first quarter of 2003 (results are omitted). Reflecting the 2003 first quarter hike of price expectations observed in Figure 2, the estimated coefficient on that time dummy is large and significant in the regression without the Iraq war “Revision Dummy.” However, the magnitude of the coefficient is much smaller if we once include the Iraq war dummy, indicating that the increase observed in the first quarter of 2003 was caused by the household responses to the outbreak of Iraq war.

In summary, we have found that current price developments and lagged price expectations contribute to form price expectations. Current income does not have strong explanatory power. Knowledge of the implementation of the quantitative easing policies did not necessarily lead to upward revisions of price expectations. However, the policy was marginally effective in the sense that it could raise the expectations of those who knew about the policy and actually revised their expectations by more than one percent in response to the early policy implementations. Other exogenous shocks such as the terrorist attack and the war in Iraq also influenced price expectations. The temporary surge of price expectations in the first quarter of 2003 was attributable to those shocks, especially that of the Iraq war.

### 6. THE EFFECT OF DEFLATIONARY EXPECTATIONS ON CONSUMPTION

In this section, we address the consequences of a change in price expectations on household behavior. We especially focus on the effect of deflationary expectations on household consumption. Deflationary expectations loosen a household’s budget constraint and may stimulate