Sayuri Shirai: Monetary easing and communication policy - a review
based on several surveys
Speech by Ms Sayuri Shirai, Member of the Policy Board of the Bank of Japan, at a seminar
held at Columbia University, New York City, 27 February 2014.
* * *
I. Introduction
It is a great honor to be here today and have the opportunity to speak at Columbia University.
I would like to add how very nice it is to return to this university, where I received my Ph.D. in
economics, and I am looking forward to exchanging views with professors and students after
my presentation. Today, I would like to talk about communication on monetary policy - a
topic of growing interest among central banks - in the context of the Bank of Japan.
To begin with, let me pose a question: why do central banks pay special attention to their
communications on monetary policy with the public (meaning market participants and the
general public)? I think there are at least three reasons: (1) to ensure central bank
accountability; (2) to enhance the effectiveness of monetary policy; and (3) (in a narrower
sense) to make active use of communication as a nontraditional monetary easing measure
among central banks in the face of the zero lower bound on short-term interest rates.
Communication plays a crucial role in successful conduct of monetary policy by the Bank. I
would like to highlight three reasons why this is so. First, the Bank adopted its 2 percent price
stability target in terms of the year-on-year rate of change in the consumer price index (CPI)
in January 2013. There is an inherent challenge in convincing households of the benefits of
this target, since they tend to see a rise in inflation as unfavorable. This is especially true
when a rise in wages does not take place immediately, or expectations of future wage growth
are not fulfilled. Thus, communication is important in this regard. Second, as stipulated in the
Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and
Achieving Sustainable Economic Growth, released in January 2013, the Bank recognized
that the inflation rate consistent with price stability on a sustainable basis would rise as
efforts by a wide range of entities to strengthen the competitiveness and growth potential of
Japan's economy progressed (Chart 1). Based on this recognition, the Bank set the price
stability target at 2 percent. In this spirit, quantitative and qualitative monetary easing (QQE)
was introduced in April 2013. Thus, promoting continuous dialogue with the government,
firms, and financial institutions is essential to achieving the target. Third and finally, the Bank
is actively using its communication strategy to generate monetary accommodation under
QQE.
Let me outline the sequence of my speech. I will first explain the Bank's current
communication practices. Next, to examine the effectiveness of QQE from a communication
perspective, I will review a range of data, such as those regarding inflation expectations, and
the results of several surveys targeting households, firms, market participants, and
economists.
II. The Bank's monetary policy communication practices
I will begin by describing in three steps the Bank's communication practices on monetary
policy. First, I will explain the legal requirement with regard to communication. Second, I will
focus on the current communication practices on monetary policy. Third and finally, I will
discuss the active use of communication as a nontraditional monetary easing measure under
QQE, that is, forward guidance with regard to the continuation of monetary accommodation.
A. Legal requirement to ensure communication accountability
The Bank enjoys independence regarding monetary policy under the Bank of Japan Act
(hereafter referred to as the Act). The Act stipulates that the mandate of monetary policy is to
achieve price stability.1 Monetary policy is determined by a majority of votes of the Bank's
Policy Board at regular Monetary Policy Meetings (MPMs). The Policy Board comprises nine
members (the Governor, two Deputy Governors, and six other members). All the members
are appointed by the Cabinet, subject to the consent of Japan's House of Representatives
and the House of Councillors, with a five-year term. The schedule of MPMs for the coming
twelve months is made public in June and December each year.
Given that monetary policy affects the daily lives of the public, in a democratic society it is
essential to conduct such policy with accountability. Therefore, the Act stipulates that the
Bank endeavor to clarify to the public the content of its decisions, as well as its
decisionmaking process, regarding currency and monetary control (that is, monetary policy). To meet
this accountability requirement, the Act requires the Bank to promptly publish the minutes of
the MPM, which provide a summary of discussions held at each MPM, and to publish a
transcript (available only in Japanese) of each MPM. The minutes of each MPM are
approved at the following MPM and released three business days later. The transcript of
discussions held at each MPM, which shows the details of each participant's remarks along
with the names of speakers, is made public ten years after the MPM concerned.
Furthermore, pursuant to the Act, the Bank periodically submits a Semiannual Report on
Currency and Monetary Control to the Diet (Japan's national government body) on its
policies. In addition, the Governor and the Bank's other officers appear frequently before the
Diet to explain current monetary policy.
B. Communication policy to enhance the effectiveness of monetary policy
There is growing consensus among central banks that communication should be enhanced
to improve transparency for the public. This reflects the view that it is best to minimize
"surprises" in financial markets that are triggered by unexpected monetary policy decisions,
to boost the effectiveness of monetary policy. Increasing transparency on future monetary
policy stances should improve public comprehension of financial forecasting, helping the
public to form views on future monetary policy stances similar to those of central banks. In
other words, such a communication policy aims to inform the public about the "normal" policy
reaction function of monetary policy or the conduct of traditional monetary policy in a normal
economic environment where the zero lower bound is absent.
This practice may favorably influence financial markets in several ways. First, clear
understanding by the public of a central bank's policy reaction function may help the public to
adjust their future short-term interest rate expectations accordingly. This would affect
longterm interest rates, since the yields reflect the average of expected future short-term interest
rates. Second, in some cases clear public understanding may decrease the level of
uncertainty and thus reduce volatilities in interest rates, foreign exchange rates, and financial
asset prices. Finally, there may be instances where the public believes that a central bank
has specialized information that can be used to assess future prices and economic activity.
In such cases, a central bank could favorably affect financial markets by making public such
detailed information.
The Bank's current monetary policy communication practices
Let me now explain the Bank's current communication practices with regard to monetary
policy. As stated earlier, monetary policy decisions are made at the MPMs, which are held
14 times each year; these are held on a regular basis, and additional unscheduled
emergency meetings may also be held. Of the 14 MPMs, there are twelve two-day meetings
held on a monthly basis with two one-day meetings at the end of April and October each
year. The Bank releases a public statement immediately after each MPM. For the two-day
monthly MPM, the statement contains (1) the policy decisions made at the MPM including
the guideline for money market operations; (2) a summary of the assessment of current
economic activity and prices, as well as the outlook (up to about six months ahead); (3) an
assessment of upside and downside risks; and (4) the future monetary policy stance. For
example, current QQE policy decisions are made at each MPM on whether the annual
monetary base increase (namely, about 60-70 trillion yen) will be maintained until the next
MPM.
During the one-day MPMs at the end of April and October, the Policy Board members
prepare forecasts for real GDP growth and core CPI inflation (CPI for all items less fresh
food) over the coming three fiscal years. For example, in the case of fiscal 2013 (beginning in
April 2013), projections were prepared for fiscal 2013-15, and were released immediately
after the MPM at the end of April 2013 (forecasts for real GDP growth rate for the previous
fiscal year - that is, fiscal 2012 - were also released in April). The median and the range of
the forecasts are disclosed together with the forecast distribution charts that are based on
the aggregated probability distributions compiled from the individual members' distributions.
The semiannual Outlook for Economic Activity and Prices (hereafter referred to as the
Outlook Report) contains the Bank's View on the outlook and risk factors for economic
activity and prices over the coming three fiscal years, as well as its views on the future
course of monetary policy. The Bank's View is approved at the MPM and published at
3:00 p.m. after the MPM, while the public statement is released immediately after the MPM.
Interim assessments of the outlook as laid out in the previous Outlook Report are
undertaken during the respective January and July MPMs, and these interim assessments
are included in the public statements.
The Governor of the Bank, as Chairman of the Policy Board, holds a press conference
usually from 3:30 p.m. on the last day of each MPM and explains the thinking behind the
decisions made. A press conference summary (available only in Japanese) is then
released on the following business day. Furthermore, a Monthly Report of Recent
Economic and Financial Developments is released on the next business day after the first
MPM of each month, and contains a detailed background of the Bank's assessment of
economic activity and prices, as well as financial developments on which policy decisions are
based.
Strengthened communication with the adoption of the 2 percent price stability target
I mentioned that the Bank improved its transparency in January 2013 by adopting the
2 percent target. This target replaced an earlier, broader target - "price stability goal in the
medium to long term" - which was defined as a positive range of 2 percent or lower with a
goal of 1 percent having been set for the time being. This broader expression was chosen to
cover the diverging views of the Policy Board members with respect to the appropriate level
of long-term inflation. I take the view that the word "goal" (especially the connotation of the
related term medo that was adopted in the Japanese version) and the ambiguous references
to the range suggested a degree of passivity. As a result, the public was unsure whether the
Bank was genuinely pursuing the 2 percent level or targeting a lower figure. Against this
background, the adoption of the 2 percent target in January 2013 eliminated such
ambiguities.
C. Communication strategy as a nontraditional accommodative monetary policy
It is widely known that theoretically one alternative accommodative monetary policy under
the zero lower bound is to introduce forward guidance by committing to the continuation of a
more accommodative policy than would otherwise have been anticipated with the normal
policy reaction function. That is, forward guidance is used as a communication strategy to
generate additional monetary accommodation. This commitment to a longer accommodative
monetary policy is needed to compensate for the period constrained by the zero lower
bound. In general, central banks in advanced economies have adopted forward guidance
with a somewhat more flexible interpretation than suggested by theory.
Forward guidance adopted under QQE
Forward guidance constitutes an important element of QQE. The Bank released a public
statement in April 2013 that introduced QQE and contained two descriptions of the time span
of monetary accommodation. The first description was a statement of the Bank's intention
to achieve the 2 percent price stability target at the earliest possible time, with a time horizon
of about two years. The second description was a statement of its intention to continue with
QQE as long as it was necessary for maintaining the 2 percent target in a stable manner.
This description also added a condition that both upside and downside risks to economic
activity and prices would be examined, and that adjustments would be made as appropriate
(Chart 2).
The purpose of the first description was to signal to the public the Bank's determination to
achieve its 2 percent target within a time horizon of about two years, normally pursued by
other central banks under an inflation targeting framework. Mentioning the specific time span
was considered essential to gain the confidence of the public as part of the Bank's intention
to overcome mild deflation. To fulfill this objective, the main operating target for money
market operations was switched from the uncollateralized overnight call rate to the monetary
base; it was then decided that the size of the monetary base would rise at an annual pace of
about 60-70 trillion yen, to be doubled in two calendar years (2013-14). Under this monetary
base target, the Bank currently purchases Japanese government bonds (JGBs) of
approximately 50 trillion yen (on an outstanding basis) each year to double the amount
outstanding in two years.2 Some market participants considered the first description to be a
strong calendar-based commitment with a time limit, from the way the Bank presented its
QQE in April 2013. My personal view is that the first description could be interpreted as both
calendar-based (about two years) as well as state-contingent (2 percent) guidances.
However, in this case, the time horizon of "about two years" should be interpreted with some
flexibility rather than as a rigid "two years."
The second description is related to a conditional commitment, because the continuation of
QQE is subject to the examination of upside and downside risk factors. It is also
statecontingent guidance (to maintain the 2 percent target in a stable manner), linked to the
continuation of QQE, and plays a greater role than the first description in stabilizing long-term
inflation expectations at around 2 percent, thus helping to reduce long-term interest rate
volatility and preventing its overshooting.
The first description can be considered as a "necessary condition" for achieving the second
description, if the first description is regarded as referring to the achievability of the 2 percent
target and the second as referring to the maintenance of the 2 percent target in a stable
manner. While the time horizon of these two descriptions could overlap, the second
description implies that time horizon is somewhat longer and that the asset purchases may
not come to an end after two years. Thus, these two descriptions are mutually non-exclusive.
Based on the framework I have described, the Bank holds the baseline scenario that core
CPI inflation (excluding the direct effects of the consumption tax hikes) is expected to reach
around 2 percent toward the latter half of the projection period of fiscal 2013-15.3 The
median of the Policy Board members' forecasts is 0.7 percent for fiscal 2013, 1.3 percent for
fiscal 2014, and 1.9 percent for fiscal 2015 (Chart 3).
Personally, I am aware of the possibility that it may take some time to achieve the 2 percent
target, since the duration depends crucially on "the pace of improvement in the employment
and income situation in Japan." Moreover, it is possible that it may take even longer to
achieve a situation where the 2 percent target is maintained in a stable manner, considering
the duration required to judge whether the condition described as "in a stable manner" is met.
During this period, support from monetary policy is likely to be necessary. As I pointed out
earlier in the joint statement of the government and the Bank, bear in mind here that the
Bank adopted the 2 percent target in January 2013, assuming that such an inflation rate
should be sustainable. Hence, the Bank's decisions on the necessity and measures of future
monetary easing should be judged in line with the objective to pursue a society with
2 percent price increase in a stable manner.
Contrast with forward guidance adopted by other major central banks
You may notice that the form of forward guidance adopted by the Bank differs greatly from
the forms adopted by other major central banks (Chart 4). First, the Federal Reserve applies
forward guidance to maintain a very low federal funds rate. Asset purchases are regarded as
a separate monetary easing policy tool and are supplementing the interest rate policy and
forward guidance. In contrast, the Bank applies forward guidance to QQE as a package.
Under QQE, the monetary base is the main operating target for money market operations,
and various assets (mainly JGBs) are purchased to fulfill the monetary base target.4
Second, the views of the Bank and other central banks differ in regard to long-term inflation
expectations. Forward guidance issued by the Federal Reserve assumes that longer-term
inflation expectations have been anchored at around 2 percent. The Bank of England (BOE)
includes a similar view in one of its conditional forward guidance "knockouts." Therefore, one
of the main tasks for these central banks is to continue with monetary easing measures to
seek economic recovery, while ensuring that the anchored inflation expectations are
maintained. In contrast, the Bank has not yet successfully anchored long-term inflation
expectations at around 2 percent. Thus, the Bank must focus on first transforming the
deflation-oriented mindset and then increasing inflation expectations to a higher level than
the current one.
Third, Federal Reserve and BOE forward guidance includes employment-related thresholds.
The Federal Reserve has a dual mandate of promoting price stability and maximum
employment, so the reason for this is clear. The BOE sees price stability as its primary
mandate; however, the inclusion of employment-related conditions may have reflected the
need to clarify its views on the trade-off between inflation and unemployment. In contrast,
there is a relatively small need for the unemployment threshold to be used in the Bank's
guidance. The unemployment rate for December 2013 was 3.7 percent, close to the lowest
point in recent years of 3.6 percent, which was attained in July 2007. Some labor issues
exist, such as the differential treatment of regular and non-regular workers and firms'
demand for increased flexibility over labor market regulations. However, these are structural
issues that are beyond the scope of monetary policy.
III. Performance of QQE in light of communication on monetary policy
Next, I would like to focus on the current performance of QQE in light of the public's
perceptions of monetary policy and price developments.
A. Households' understanding of the QQE framework and inflation expectations
Households are important economic entities that undertake consumption and residential
investment. Thus, understanding their current and future behavior is essential to examining
the transmission mechanism of monetary easing. Moreover, changes in households' inflation
expectations are likely to influence actual inflation by affecting their consumption and
residential investment demand (and thus the output gap) as well as wage negotiations.
Awareness of the 2 Percent Target and QQE
In relation to the public's knowledge of QQE, the quarterly Opinion Survey on the General
Public's Views and Behavior conducted by the Bank posed a new set of questions in its
September and December 2013 surveys. These included (1) whether respondents knew of
the 2 percent price stability target, and (2) whether respondents knew that the Bank had
embarked on QQE.5 The first question results indicated that 78 percent of the respondents
were aware of the 2 percent target in the September survey (Chart 5); however, the detailed
analysis revealed that only 37 percent said that they "know about it" while 41 percent said
that they "have read or heard of it, but do not know much about it." In the December survey,
the overall awareness of the 2 percent target dropped significantly to 60 percent and only
29 percent of the respondents said that they "know about it" and 31 percent said they "have
read or heard of it, but do not know much about it."
Regarding the second question results, the September survey indicated that 72 percent of
the respondents were aware of QQE; however, the detailed analysis showed that only
29 percent said that they "know about it" while 43 percent said that they "have read or heard
of it, but do not know much about it." In the December survey, those claiming awareness of
QQE dropped slightly to 69 percent, with 39 percent saying they "have read or heard of it, but
do not know much about it." However, the proportion of respondents who answered that they
"know about it" increased slightly from the September survey, accounting for 30 percent.
Moreover, one of the regular questions in the same survey was whether the respondents
perceived the present price levels to have risen compared with one year earlier. In the
September and December surveys, about 67 percent of the respondents said that prices
"have gone up" (either "significantly" or "slightly"). Furthermore, more than 80 percent of the
respondents that stated prices "have gone up" described the price rise as "rather
unfavorable" in both surveys, while that proportion has followed a long-term declining trend
(Chart 6).
These various survey results suggest that QQE is fairly widely known to the public. At the
same time, it is striking to note that the majority view price rises as unfavorable. This implies
that the importance of achieving the 2 percent target may not be widely understood and
shared by households. Thus, it is vitally important for the Bank to clearly explain to the public
and respond to questions as to why the Bank aims to achieve the 2 percent price stability
target and how this will improve daily lives in the medium to long term. This is particularly
important given that a consumption tax hike is scheduled in April this year, and the inflation
rate may temporarily exceed 2 percent, together with the effects of monetary easing.
Long-term inflation expectations and sources of inflation used to form expectations
Now let us look at households' long-term inflation expectations to see whether they tend to
rise reflecting the impact of QQE. The Bank usually forms its understanding of inflation
expectations based on various indicators, but for the sake of simplicity I will use the Bank's
aforementioned opinion survey as a crude indicator to measure long-term inflation
expectations. In doing so, I will focus on the median of the respondents with regard to their
inflation expectations over the next five years (changes in price levels per year on average).
The data should be interpreted with caution, since an empirical analysis based on the Bank's
opinion survey has pointed out that households' inflation expectations are upward-biased.6 It
should be noted that the responses exclude the potential impacts of the consumption tax
hikes from the June 2013 survey. Chart 7 shows that households' long-term inflation
expectations have remained steady at around 2.0-2.5 percent since the middle of 2011, and
thus there is no rising trend to date. The same survey also asks about present price level
perceptions (change in price levels compared with one year ago) and the results show a
clear rising trend since early 2013.7
Some might wonder about the source of information used by households when forming
longterm inflation expectations. The September 2013 survey included a special set of questions
about the "basis for the perception" of the present price levels as well as the outlook for price
levels over the next five years. Respondents could choose up to three answers from
predefined choices. An interesting result was that the respondents relied more on general
pricerelated information and various other sources when forming longer-term inflation
expectations than when forming perceptions on present price levels. For example, they relied
heavily on "media reports on individual prices of goods and services and prices in general,"
"developments in foreign exchange rates such as depreciation/appreciation of the yen,"
"developments in stock prices and land prices," and "the Bank of Japan's monetary policy"
(Chart 8). In contrast, it showed that they relied heavily on "developments in prices of
frequently purchased items such as foodstuffs" and "developments in gasoline prices" when
forming perceptions of the present price levels.
These observations may suggest that households tend to use rational expectations - in
addition to adaptive expectations - when forming longer-term inflation expectations. For
example, past research shows that about 40 percent of households' inflation expectations is
allocated to adaptive expectations and nearly 60 percent to rational expectations.8 Hence, a
deeper understanding of the QQE framework as well as the actual and past price increases
may help raise households' inflation expectations and increase the achievability of the 2
percent target.
B. Firms' views on the 2 percent target and inflation expectations
Firms are very important economic entities, since they are not only producers and investors
but also major borrowers from financial markets. Moreover, they are price setters that
6
Note here that households who hold negative inflation expectations tend to choose zero rather than the true
value. See Koichiro Kamada, "Downward Rigidity in Households' Price Expectations: An Analysis Based on
the Bank of Japan's 'Opinion Survey on the General Public's Views and Behavior,'" Bank of Japan Working
Paper Series, No. 13-E-15, 2013.
7
The same survey also provides information on short-term inflation expectations over the next twelve months;
these showed an increase in the March 2013 survey (but not to as high a level as after 2010) and have since
remained at the same level as the June 2013 survey. On the other hand, the Consumer Confidence Survey
compiled by the Cabinet Office showed a clear rise in the pace of increase in short-term inflation expectations
(in the next twelve months) from the beginning of 2013. However, it is not clear whether such expectations
included the tax effects.
8
See Ko Nakayama and Kazuo Oshima, "Infure Kitai no Keisei ni Tsuite (On Inflation Expectations)," Bank of
Japan Working Paper Series, 99-7, 1999 (available only in Japanese). The paper uses short-term inflation
expectations (one year ahead).
significantly influence actual inflation. During the period of prolonged mild deflation, firms
tended to set their sales prices according to their competitors' and clients' demand, rather
than in response to the output gap or cost developments. This was partly attributable to an
increase in the price elasticity of demand caused by intensified competition at home and
abroad, and a series of negative demand shocks. Thus, in aiming to achieve the 2 percent
target, it is important to examine firms' recognition of QQE and inflation expectations to
analyze whether their price-setting behavior is changing.
Views on the achievability of the 2 percent target
Regarding the recognition of QQE by firms, we could look at QUICK Tankan, a monthly
statistical survey compiled by QUICK Corp., which is often used as an early indicator of the
Bank's Tankan (Short-Term Economic Survey of Enterprises in Japan). QUICK Tankan
included a special question in its January 2014 survey on "the achievability of the 2 percent
target" (Chart 9).9 The result indicated that 62 percent of the respondents stated "an even
chance," followed by "the probability is low" (23 percent) and "the probability is high"
(15 percent). This may suggest that, compared with households, firms generally have higher
recognition of QQE and hold a better outlook for its achievability. Looking at sector
breakdowns, approximately 60 percent of both manufacturing and nonmanufacturing firms
stated "an even chance" and approximately 20 percent of both stated that "the probability is
low." In contrast, 50 percent of financial institution respondents stated "an even chance" and
40 percent stated "the probability is low." The fact that the majority of firms responded "an
even chance" suggests that their perception could swing either way. Nonetheless, those with
indecisive views could be adjusted toward "the probability is high," as the collective efforts of
all economic entities to overcome mild deflation make further progress and as firms gain
greater confidence in QQE through the Bank's further communication efforts.
Inflation expectations and sources of inflation used to form expectations
The most frequently used indicator of firms' inflation expectations is obtained from the Bank's
quarterly Tankan.10 Generally, it uses the diffusion index (DI) of "rise" minus "fall" with respect
to output prices for the next quarter. In addition, the difference between this DI and the
correspondent DI for input prices is often used as a proxy for profit margins (Chart 10). It is
known that the DI for output prices tends to be downward-biased and the DI for input prices
tends to be upward-biased, so the interpretation of these indicators needs to take these
tendencies into account.11 The drawback of this approach is that the data are only available
for the next quarter, so only very short-term inflation expectations can be measured. The
chart shows that there are some signs of an increase in firms' inflation expectations based on
the DI for output prices, but the indicator has leveled off very recently. Fortunately, the Bank
will begin publishing a survey of firms' longer-term inflation expectations (looking one, three,
and five years ahead) beginning with the March 2014 Tankan survey. It is expected that this
will promote a better understanding of firms' inflation expectations and their price-setting
behavior.
Regarding factors contributing to firms' inflation expectations, the Annual Report on the
Japanese Economy and Public Finance 2013, compiled by the Cabinet Office, conducted an
interesting survey in February 2013. It showed that firms tend to raise their outlook for sales
prices of goods and services over the next year when they project that market prices over the
same period will increase.12 This response was provided by approximately 70 percent of
manufacturing respondents and more than 50 percent of nonmanufacturing respondents. In
other words, if an increase in demand for goods and services leads to a rise in market prices,
this may induce firms to raise their sales prices. This situation is more likely to occur if a
sustainable expansion of the domestic market is projected.
In addition, firms may reflect more adaptive expectations than households when forming
inflation expectations. For example, it should be noted here that about 50-70 percent of
firms' inflation expectations is allocated to adaptive expectations and about 50-30 percent to
rational expectations.13 Hence, the actual and past price performances may be the most
important element in raising firms' inflation expectations to achieve the 2 percent target, while
at the same time, a deeper understanding of the QQE framework could also be of help.
C. Market participants' and economists' views on the 2 percent target and
inflation expectations
In addition to the views of households and firms, it is important to pay attention to the views
of market participants and economists. After all, financial markets do influence the behavior
of households and firms through changes in interest rates, foreign exchange rates, and
financial asset prices. Moreover, the financial market indicators reflect financial asset
valuations by market participants and economists as well as their expectations of future
inflation and economic developments. These indicators respond directly to monetary policy
measures, the release of the latest macroeconomic data, news items, and exogenous
shocks.
Views on achievability of the 2 percent target
Generally, market participants and economists are familiar with the QQE fram