Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Business Leaders in Okayama
Goushi Kataoka
Member of the Policy Board
I. Developments in Economic Activity and Prices
A. Recent Developments and Outlook for Economic Activity at Home and Abroad
I would like to start my speech by looking at developments in the global economy affecting
Japan's economy. Since the autumn of 2017, improvement in economic sentiment has been
noticeable worldwide (Chart 1). The global Purchasing Managers' Index (PMI) has shown
remarkable improvement for manufacturing activity in particular, and business fixed
investment and trade volume have been increasing. One of the factors underlying this
improvement in economic sentiment is that, while advanced economies remain robust, there
is a cyclical factor of continued moderate recovery in production for the resource and
manufacturing sectors, which bottomed out in 2016 amid the waning of concern over a
slowdown in emerging economies, especially China. The cultivation of the potential
demand by utilizing new technologies -- such as the Internet of Things (IoT), artificial
intelligence (AI), and autonomous driving -- also contributes to the improvement to some
extent (Chart 2).
Looking at the global economy from the two perspectives of the real GDP growth rate and
the inflation rate, developments can be described as follows. Until 2016, the economy
remained in a phase where sluggish growth coexisted with low inflation. In 2017, it moved
into a phase where an improving trend in the growth rate became evident while the inflation
rate remained low. Looking ahead, the global economy is likely to shift to a phase where
inflation is clearly accelerated by continued relatively high growth if various downside risks
that have been pointed out, such as the following, do not materialize: (1) the risk of
monetary policy normalization in the United States and Europe exerting downward pressure
on the global economy; (2) the risk of deceleration in the Chinese economy; and (3)
geopolitical risks surrounding North Korea and the Middle East. One of the key points for
the time being is whether the global economy will reach the phase of rising inflation with
high growth that I just mentioned, while avoiding a situation of economies stalling, with
major economies beginning to see changes in their monetary policy stances, and if such a
phase is achieved, when that will happen.
Next, I would like to turn to developments in Japan's economy. Supported by the moderate
growth in the global economy, Japan's real GDP has continued to mark positive growth for
eight consecutive quarters since the first quarter of 2016. The annual real growth rate for
2017 stood at 1.6 percent, the highest level since 2013 (Chart 3). The breakdown by
component during this period shows that private business fixed investment and exports are
the major driving forces of the growth.
With regard to the outlook, in fiscal 2018, Japan's economy is likely to continue growing at
a pace in the range of 1.0-1.5 percent, exceeding its potential (Chart 4). This is because
business fixed investment will increase, reflecting improvements in corporate profits and
business sentiment, and exports will rise on the back of robust growth in the global
economy. These positive developments will then transmit more strongly than before to
households through a rise in wages, which will lead to some acceleration in the pace of
growth in private consumption. Meanwhile, it is highly likely that the economic growth rate
for fiscal 2019 will decrease to the range of 0.5-1.0 percent, reflecting such factors as (1)
the effects of the consumption tax hike scheduled in October 2019 and (2) deceleration in
business fixed investment due to the peaking out of Olympic Games-related demand.
Now, I would like to talk about the effects of the scheduled consumption tax hike. The hike
will have some impact on the GDP growth rates, mainly due to changes in household
spending, through the following two major channels: (1) the front-loaded increase and
subsequent decline in demand prior to and after the consumption tax hike and (2) the
decline in real income. At present, the negative impact of the hike on the projected growth
rate for fiscal 2019 is likely to be smaller than that on the rate for fiscal 2014, when the last
hike took place. This is because the increase in the consumption tax rate is smaller than that
of the most recent tax hike and a reduced tax rate will be applied to some items. In addition,
as the consumption tax hike is scheduled to take place in the middle of the fiscal year, there
are technical factors; namely, that the front-loaded increase and subsequent decline in
demand prior to and after the hike will offset each other during the fiscal year, and a decline
in real income could only occur in the second half of the fiscal year.
B. Recent Developments and Outlook for Japan's Prices
Next, I will move on to recent price developments in Japan and their outlook.
Looking at recent developments in the consumer price index (CPI), the year-on-year rate of
increase in the CPI for all items less fresh food for January 2018 was 0.9 percent. However,
it should be noted that the contribution of energy items was significant, at 0.5 percentage
point, and in terms of the rate of increase for all items less fresh food and energy, which
directly reflects domestic supply-demand conditions, the rate only stood at 0.4 percent
year-on-year. Although this rate indicates a continued moderate increase, its level is still low,
mainly against the background that firms' wage- and price-setting stance remains cautious
so far.
As for the outlook, I would like to first take a look at the Bank's baseline scenario.
According to the Outlook for Economic Activity and Prices (Outlook Report) released in
January 2018, inflation expectations are projected to rise as firms' stance gradually shifts
toward raising wages and prices with the economy still growing at a pace above its potential
and the output gap continuing to improve. It also indicates that, as a consequence, the
inflation rate is likely to continue on an uptrend and increase toward 2 percent. With this
mechanism operating, the inflation rate -- specifically, in terms of the median of the Policy
Board members' forecasts for the year-on-year rate of change in the CPI (all items less fresh
food) -- is projected to rise to around 1.8 percent through fiscal 2019, excluding the direct
effects of the consumption tax hike (Chart 4).
In contrast to this baseline scenario, I consider that the possibility of the year-on-year rate of
change in the CPI increasing to 2 percent through fiscal 2019 is low at this point. This
difference in the price outlook reflects the discrepancy in how to view the overall
effectiveness of the current monetary easing policy and the functioning of the policy's
transmission channels. I will elaborate on this later when I explain the conduct of monetary
policy.
II. Conduct of Monetary Policy
In what follows, I describe the Bank's monetary policy. I would like to first explain the
current framework and then present my views on policy measures necessary for achieving
the Bank's price stability target.
In January 2013, the Bank set the price stability target at 2 percent in terms of the
year-on-year rate of change in the CPI, and has been aiming at achieving this target at the
earliest possible time. The Bank also announced strengthening of policy coordination with
the government by releasing a joint statement, and the two entities have been working
together to overcome deflation early and achieve sustainable economic growth with price
stability. Under these circumstances, the Bank introduced Quantitative and Qualitative
Monetary Easing (QQE) in April 2013. Since September 2016, it has been conducting
monetary policy under the framework of QQE with Yield Curve Control. This current
framework for monetary policy consists of two major components (Chart 5).1
The first is yield curve control in which the Bank controls short-term and long-term
nominal interest rates and thereby encourages a decline in real interest rates -- calculated as
nominal interest rates minus expected inflation rates -- so as to achieve highly
accommodative financial conditions and stimulate economic activity and prices. The Bank
has set the short-term policy interest rate at minus 0.1 percent and the target level of 10-year
Japanese government bond (JGB) yields at around 0 percent. It conducts purchases of JGBs
so as to achieve these targets, thereby encouraging the formation of an optimal shape of the
yield curve to achieve the 2 percent price stability target.
The second component is an inflation-overshooting commitment. Under this commitment,
the Bank continues expanding the monetary base until the year-on-year rate of increase in
the observed CPI (all items less fresh food) exceeds 2 percent and stays above this target
level in a stable manner. With this commitment, the Bank aims to increase its credibility
among the public that it will achieve the 2 percent price stability target by ruling out the
possibility of a change in the direction of monetary policy at an early stage when
achievement of the target comes in sight.
In my view, this monetary policy framework will lead to higher inflation, mainly through
four transmission channels (Chart 6). The first is highly accommodative financial conditions
-- accompanying declines in real interest rates through declining nominal interest rates and
in risk premia -- to bring about an improvement in the output gap. The second is the
improvement in the output gap to push up the observed inflation rate. The third is the rise in
the observed inflation rate resulting in higher inflation expectations through the adaptive
expectation formation mechanism, which further raises the observed inflation rate. And the
fourth channel is that the Bank's strong commitment to achieving the 2 percent price
stability target will directly raise inflation expectations, prompting a rise in the observed
inflation rate in turn.
Earlier, when I described the outlook for prices, I mentioned that the possibility of the
year-on-year rate of change in the CPI increasing to 2 percent through fiscal 2019 is low.
This is because I still lack confidence that the four transmission channels I have just
explained are operating to an effective extent whereby the inflation rate will be pushed up to
reach 2 percent, even though more than a year has passed since the Bank's adoption of QQE
with Yield Curve Control. Of course, the positive effects of monetary easing are likely to
strengthen gradually, given that the improvement in the output gap continues. At this point,
however, my view is that the momentum for a rise in inflation is not strong enough to reach
2 percent through fiscal 2019.2
To illustrate this, I plot the relationship of the output gap and the inflation rate on a graph
(Chart 7). In the period after the adoption of QQE leading up to the introduction of QQE
with Yield Curve Control, the slope of the trend line became somewhat steep and the line's
level rose (Chart 7, red line in the left-hand panel) compared with that for an earlier period
(black line in the same panel). These developments suggest that ideal changes in the
economy had been taking place, implying that the effects through the second channel -- that
is, the improvement in the output gap that thereby pushes up the observed inflation rate --
2
For the inflation rate to increase to 2 percent going forward, I consider that it is essential to
achieve a widening of the output gap that exceeds 2 percent, as well as a rise in the expected
inflation rate that is greater than that observed during 2013 and 2014. This view is based on a
projection of price developments derived by (1) estimating the so-called hybrid New Keynesian
Phillips curve that takes the expected inflation rate, the observed inflation rate, the output gap, and
the consumption tax dummy as explanatory variables and then (2) applying projections of the output
gap -- deduced from the forecasts of the majority of the Bank's Policy Board members on real GDP
growth -- and the expected inflation rate.
had been enhanced, and that both the third and the fourth channels had begun to operate
following a rise in inflation expectations. Taking a look at developments since the
October-December quarter of 2016, when the Bank introduced QQE with Yield Curve
Control, however, the slope of the trend line has become gradual and the line's level has
declined slightly, although these changes should be regarded as being subject to a margin of
error due to a limited sample size (Chart 7, green line in the left-hand panel). This suggests
the possibility that, although the first channel has been operating, the other three channels
have not yet been doing so to their full extent.3
In other words, under the current monetary policy framework, supply-demand conditions
are tightening further, but this has not yet affected firms' overall price-setting stance toward
raising prices.4 It also should be noted that the rise in inflation expectations remains
moderate, partly reflecting the moderate pace of increase in the observed inflation rate.
Short-term inflation expectations have increased somewhat, due mainly to the rise in crude
oil prices, but they have not recovered to the level seen in the period between mid-2014 and
mid-2015, when such expectations shifted from increasing to being flat. Medium- to
long-term inflation expectations remain somewhat weak (Chart 8). I would note that the
inflation-overshooting commitment was effective in stopping a decline in inflation
expectations, but it has not been sufficient to clearly increase inflation expectations.
On the basis of such understanding, I believe that further monetary easing is necessary to
achieve the price stability target at an early stage. Specifically, the Bank should purchase
JGBs so that yields on JGBs with maturities of 10 years and longer will broadly be lowered
further. With a view to reinforcing the inflation-overshooting commitment, the Bank should
also add the commitment that, in terms of the medians of the Policy Board members'
3
These facts also can be confirmed from an estimate of the Phillips curve with time-varying
parameters (Chart 7, the right-hand panel).
4
The output gap estimated by the Bank's Research and Statistics Department became positive from
the October-December quarter of 2016 and has increased further to 1.35 percent in the
July-September quarter of 2017. Having said that, a further widening of the output gap is necessary
to affect firms' overall price-setting stance toward raising prices, in view of the fact that the average
of the output gap was in the range of 2.5-3.0 percent in the past when the year-on-year rate of
increase in the CPI (all items less fresh food and energy) exceeded 2 percent on a basis excluding the
effects of consumption tax hikes.
forecasts presented in the Outlook Report, if there is a delay in the timing of achieving the
price stability target due to domestic factors, the Bank should take additional easing
measures.
I would note that a further lowering of yields on JGBs with maturities of 10 years and
longer will promote business fixed investment and housing investment to a greater extent
from the financial side. This lowering of JGB yields is also expected to have synergy effects
with the government's fiscal policy providing tax support for firms that have a positive
stance toward making fixed investment and raising wages. These developments will further
increase the pace of improvement in the output gap, and thus enhance the dynamism of the
rise in the inflation rate through the first and second transmission channels that I explained
earlier. Among many options for additional monetary easing measures under yield curve
control, the further lowering of yields on JGBs with maturities of 10 years and longer is the
best at this point, in my view, considering the balance between positive and negative effects.
Strengthening of the inflation-overshooting commitment aims at increasing the transmission
effects of higher inflation expectations on the observed inflation rate -- in other words,
increasing the effects through the third and fourth transmission channels. The rise in
inflation expectations from 2013 was attributable to the Bank's decision to introduce an
inflation targeting policy. It also was attributable to the initiatives taken to achieve the
policy; the Bank announced the strengthening of policy coordination with the government
by releasing the joint statement, and the two entities have taken concrete actions by
implementing flexible fiscal policy and bold monetary policy as well as the growth strategy.
In order to influence inflation expectations, it is essential that policy coordination with the
government aiming at achieving the price stability target be firmly ensured through both
entities' concrete actions. The Bank, for its part, should further promote powerful monetary
easing backed by a clear and strong commitment to achieving the price stability target.
III. Reason for Importance of Achieving and Maintaining the Price Stability Target
As the global economy continues to grow at a moderate pace, the Federal Reserve is on
course to raise policy interest rates and the European Central Bank is moving toward an exit
from monetary easing. Under such circumstances, there is some speculation, especially
overseas, that Japan's monetary policy might also shift to a tightening in the near future, or
might at least make a slight adjustment toward an exit from monetary easing. However, the
inflation environment in Japan differs substantially from that in the United States and major
countries in Europe. I believe that, in Japan, there is still a long way to go before
considering a change in monetary policy stance.
Let me first look at price developments in Japan as well as in the United States, where the
policy rate hike is proceeding. Chart 9 compares developments in the inflation rate
excluding those of fresh food and energy between Japan and the United States since 1995.
The bold black line indicates an inflation rate of 2 percent and the gray bands show
recession periods. In the United States, the inflation rate has been more or less at around 2
percent from 1995 to the present. On the other hand, in contrast to the United States, the
inflation rate in Japan moved in negative territory for most of the time during the period
between the latter half of 1998 and early 2013. In 2013 onward, the inflation rate has turned
positive, mainly due to the introduction of QQE, but remains distant from 2 percent.
Such a difference in price developments between Japan and the United States is often
compared to the existence or absence of an anchor that stabilizes a ship in the ocean. The
inflation rate generally fluctuates with volatilities of and shocks to the macroeconomics and
market conditions, such as crude oil price changes. In the United States, however, the
inflation rate has returned to close to 2 percent even after major shocks such as the global
financial crisis following the failure of Lehman Brothers. This is because people's inflation
expectations are firmly fixed, just as a ship is anchored, at around 2 percent.5 In my view,
the reason why incremental policy rate hikes have been possible in the United States so far
is that inflation expectations are judged to be anchored well. In Japan, on the other hand,
firms' and households' mindset has been formed under the prolonged deflationary
environment after the mid-1990s, such that economic activity assuming no inflation has
become rational. In other words, Japan has lost the anchor for inflation expectations and has
been stuck in a deflationary equilibrium.6
The Bank, through its bold monetary easing policy, now aims at shifting the economy from
being stuck in a deflationary equilibrium to entering an inflationary equilibrium in which
inflation expectations are anchored at around 2 percent. However, as I have explained so far,
the improvement in the inflation rate is not enough and still only halfway accomplished. If
the direction of monetary policy is changed without deep consideration in such a situation,
there is a risk of the economy fully returning to a deflationary equilibrium.
After the introduction of QQE in April 2013, inflation expectations rose steadily toward 2
percent. However, the momentum weakened, stemming from the consumption tax hike and
the fall in crude oil prices. Subsequently, a headwind -- that is, a slowdown in emerging
economies and instability in global financial markets -- led to sluggishness in inflation
expectations. This experience suggests that, at the stage where the 2 percent price stability
target is not yet achieved, inflation expectations are susceptible to negative economic
shocks and the economy could easily return to a deflationary equilibrium.7
That is the very reason why it is necessary to carefully conduct the current monetary policy
by giving full consideration to risks to economic activity and prices.8 Going back to my
6
See James Bullard, "Seven Faces of 'The Peril'," vol. 92,
Federal Reserve Bank of St. Louis Review,
no. 5 (2010): 339-52. Based on Japanese and U.S. data for 2002-2010, Bullard discusses the
possibility of the U.S. economy at that time falling into a deflationary equilibrium like Japan, and
analyzes monetary policy so as to avoid such equilibrium.
7
See Ryan Banerjee and Aaron Mehrotra, "Deflation Expectations," no. 699
BIS Working Papers,
(February 2018). The authors found that, by analyzing inflation expectations across 43 economies,
expectations become "less well anchored" and are associated with "somewhat higher
backward-lookingness" during deflations.
8
In assessing the effects of large-scale monetary policy on the financial system and the functioning
of financial intermediation, multiple factors also should be taken into account; for example, (1)
effects of developments in lending rates, (2) declines in firms' bankruptcy rates and in banks' credit
costs, both resulting from monetary easing, and (3) effects of improvement in asset markets pushing
up financial institutions' profits. When making monetary policy decisions, it is necessary to give due
consideration to the likelihood that the longer it takes to achieve the price stability target, the more
risks to the robustness of the financial system arise.
earlier reference to recent developments and the outlook for economic activity and prices,
from the perspective of careful conduct of monetary policy, I believe that the following two
points require due attention, particularly with regard to the assessment of economic
developments in fiscal 2019.
The first point to be considered is that, since the most recent consumption tax hike in fiscal
2014, a rise in real disposable income has not strongly linked to an increase in real
consumption. It should be noted that, if the next consumption tax hike scheduled in October
2019 causes similar effects, improvement in aggregate demand will not make sufficient
progress. I also would note the possibility that, if the tax hike takes place when the anchor
of inflation expectations is not yet functioning effectively, people's inflation perceptions
might change and, mainly due to declines in consumption, inflation expectations might
become sluggish again.9 That is, there is a possibility that the tax hike could increase
downward pressure on prices through both channels of the output gap and inflation
expectations (Chart 10).
The second point is that there is some possibility that risks to developments in overseas
economies will materialize by fiscal 2019. If the risks materialize, Japan's economy will
slow down to some degree as it loses support from the firm growth in the global economy.
In my view, particular attention should be paid to the risk that U.S. monetary policy
normalization will put downward pressure on the global economy, as its potential impact on
the global economy is larger than that of other risks.
Following the bursting of the bubble in the 1990s, Japan experienced a prolonged period of
economic stagnation aggravated by deflation, described as the "lost two decades."10 Since
2013, the price situation is finally no longer deflationary, owing to the improvement in the
environment surrounding firms and households -- such as represented by the employment
situation -- in addition to the Bank's implementation of bold monetary easing policy.11
While Japan's economy is still on its way toward achieving and maintaining the price
stability target, as I described earlier, it is necessary to augment the momentum of the
virtuous cycle that has emerged during the process toward achieving this target, and put an
end to the "lost two decades" for good by realizing the target at an early stage. As a member
of the Policy Board of the Bank, I will continue to devote the best of my abilities toward
achieving and maintaining the price stability target.
Thank you for your attention.
10
For details about Japan's prolonged stagnation, see the following publications: (1) Koichi Hamada,
Anil Kashyap, and David Weinstein,
Japan's Bubble, Deflation, and Long-term Stagnation
(Massachusetts: The MIT Press, 2010); (2) Masazumi Wakatabe,
Japan's Great Stagnation and
(New York: Palgrave Macmillan, 2015); and (3) Kataoka Goushi,
Abenomics: Lessons for the World
[Japan's Lost Two
Nihon no "Ushinawareta 20-nen": Defure o koeru keizai seisaku ni mukete
Decades: For economic policies to overcome deflation] (Tokyo: Fujiwara-Shoten, 2010).
11
See Adachi Seiji, "2 pāsento no infure mokuhyō wa datō ka" [Is an inflation target of 2 percent
appropriate?], (Japan Association of Business Cycle studies), no. 64, November
Keiki to Saikuru
2017. Adachi estimates a New Keynesian Phillips curve by adopting the framework of the Logistic
Smooth Transition Autoregressive model, on the assumption of two regimes; namely, a "deflationary
regime" and an "inflationary regime." Looking at the estimates on the probability of a regime change,
the figure for the April-June quarter of 2017 is estimated at 57.8 percent. While this is greater than
50 percent -- the threshold between the "deflationary regime" and the "inflationary regime" -- it
suggests that the economy is still distant from 100 percent, a level that would indicate the economy's
complete overcoming of deflation.
Economic Activity, Prices,
and Monetary Policy in Japan
Speech at a Meeting with Business Leaders in Okayama
March 1, 2018
Goushi Kataoka
Member of the Policy Board of the Bank of Japan
Projections of Real GDP Growth by
Global PMI
Major Economies (as of January 2018)
DI, % pts.
y/y % chg., % pts.
60
Global Manufacturing PMI Output Index
Projection
Global Services PMI Business Activity Index
Revision
for CY 2018
World
3.9 +0.3
55
Advanced economies
2.3 +0.3
United States
2.7 +0.2
50
Euro area
2.2 +0.6
Emerging market and
4.9 +0.1
developing economies
45 China
6.6 +0.6
13 14 15 16 17 18
CY
Note: Figures in the column "Revision" indicate differences from the
Note: Figures are from the J.P. Morgan Global PMI. Figures above 50
projections as of January 2017.
indicate improvement and below 50 show deterioration on a
Source: IMF, "World Economic Outlook Update, January 2018."
month-on-month basis.
Source: IHS Markit (© and database right IHS Markit Ltd 2018. All
1
rights reserved.).
Global Semiconductor Demand by End Use
bil. USD
350
300
Automotive
Industry, etc.
250
Consumer
200
Computer,
150
etc.
100
Communica-
50
tions
0
CY 13 CY 16
Note: "Communications" includes smartphones, "Computer, etc." includes PCs and data centers, "Consumer"
mainly represents household electrical appliances, and "Industry, etc." includes industrial robots.
2
Source: Semiconductor Industry Association, 2017 and 2014 Factbook.
Real GDP Growth and Breakdown by Component
ann., q/q % chg.
20
Private consumption Private business fixed investment, etc.
Government spending Exports
15
Imports Change in inventories, etc.
Real GDP
10
5
0
-5
-10
-15
CY CY 13 13 14 14 15 15 16 16 17 17
Medians of the Policy Board Members' Forecasts (as of January 2018)
y/y % chg.
CPI
Excluding the
effects of the
Real GDP (all items less
consumption
fresh food)
tax hike
FY 2017 +1.9 +0.8
Forecasts made in
+1.9 +0.8
October 2017
FY 2018 +1.4 +1.4
Forecasts made in
+1.4 +1.4
October 2017
FY 2019 +0.7 +2.3 +1.8
Forecasts made in
+0.7 +2.3 +1.8
October 2017
Chart 5 QQE with Yield Curve Control
Yield Curve Control
Inflation-Overshooting Commitment
JGB yield (%)
Inflation rate (%)
Target level of 10-year
JGB yields:
around 0 percent 2 %
0
Short-term policy interest rate:
minus 0.1 percent
Time
C i i f b i
Chart 6 Transmission Channels of
Monetary Easing to Prices
Reinforcement of
Decline in Nominal Interest
Commitment
Rates and Risk Premiums
Declining real interest rates through
declining nominal interest rates
Improving credibility in
Facilitating private investment
4 inflation targeting policy
1
Stabilizing financial markets
Exerting synergy effects with fiscal policy
Improvement in Output Gap Rise in Inflation Expectations
Greater increases in base wages
Increasing upward pressure on wages
Adaptive formation of
inflation expectations Facilitating cost pass-through
Improving labor market conditions
2
3
Realization of inflation expectations
Raising capital utilization rates
Increasing effectiveness of monetary easing
Increase in Inflation Rate
Achievement and Maintenance of
6
the Price Stability Target
Chart 7 Output Gap and Inflation Rate
Reference: Intercept and Slope of
Output Gap and Inflation Rate
the Phillips Curve
%
Introduction of
Introduction of QQE
3
Yield Curve Control
(April 2013)
% (September 2016)
1.2 0.25
Before QQE with Yield Curve Control
Intercept
Apr. 2013-Sept. 2016
2
Slope (right axis)
After QQE with
0.8 0.20
Yield Curve Control
Rate 1
Oct. 2016-Dec. 2017
0.4 0.15
Inflation
0
Oct. 1999-Mar. 2013
0.0 0.10
-1
-0.4 0.05
-2
-8 -6 -4 -2 0 2 4
%
Output Gap (3-quarter lagged) -0.8 0.00
CY 10 11 12 13 14 15 16 17
Notes: 1. Trend lines are determined as <Inflation Rate> = Intercept + Slope *
Notes: 1. Figures are estimation results of the Phillips curve obtained by
<Output Gap [-3]>.
employing time-varying intercepts and slopes in the left-hand
2. Inflation rate (vertical axis) shows year-on-year growth in the CPI (all
panel. Estimation period is from January 1983 through December
items less fresh food and energy).
2017.
3. Output gap (horizontal axis) is lagged behind the inflation rate by 3
2. Output gap is lagged by 3 quarters (lag is determined by the AIC).
quarters. Figures are estimated by the Research and Statistics
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Department of the Bank of Japan (lag is determined by timing
correlation).
7
Sources: Ministry of Internal Affairs and Communications; Bank of Japan.
Chart 8 Inflation Expectations
Synthetic Indicators of Inflation Expectations
Obtained through Principal Component
Firms' Inflation Expectations (Tankan)
Analysis (Medium- to Long-Term)
y/y % chg.
y/y % chg.
2.0
2.0
Consensus Forecasts
QUICK Survey
Inflation swap rate
1.5
1.5
1.0
1.0
0.5
0.5
1-year horizon 3-year horizon
5-year horizon
0.0
0.0
CY 10 11 12 13 14 15 16 17
CY 14 15 16 17
Notes: 1. Lines in the left-hand panel show the average outlook for general prices for all industries and enterprises released in the Tankan.
2. Inflation expectations of firms, households, and experts are synthesized in the right-hand panel. Inflation expectations of firms are represented by
the Tankan and those of households are represented by the Bank's Opinion Survey on the General Public's Views and Behavior. For experts' inflation
expectations, data from the Consensus Forecasts, the QUICK Survey, and the inflation swap rate are used, which is shown as the different lines
respectively.
3. Semiannual data from the Consensus Forecasts up through 2014/Q2 are linearly interpolated. Figures for the Opinion Survey exclude inflation
expectations by respondents whose annual inflation expectations were ±5% or greater. The output prices DI in the Tankan represents the difference
between the share of firms that raised prices in the preceding three months and the share of firms that lowered prices.
8
Sources: Consensus Economics Inc., "Consensus Forecasts"; QUICK, "QUICK Monthly Market Survey (Bonds)"; Bloomberg; Bank of Japan.
Chart 9 Comparison of Inflation Rates
in the United States and Japan
Japan
United States
%
%
3 3
2 2
1 1
0 0
-1 -1
-2 -2
CY 95 00 05 10 15 CY 95 00 05 10 15
Notes: 1. Red dots show year-on-year changes in the