ESRI Discussion Paper Series No.300
Disagreement and Biases in Inflation Expectations of Japanese Households

Yuko Ueno
Deputy Director, Department of Business Statistics, Economic and Social Research Institute, Cabinet Office
Ryoichi Namba
Official, Department of Business Statistics, Economic and Social Research Institute, Cabinet Office

Abstract

This study examines how Japanese consumers’ inflation expectations are formed by the use of micro-level dataset of the prediction error of expected inflation rate. Recently in Japan, the interest is growing in the policies that intend to work on the inflation expectations of consumers and firms. Effects of such policy depend on expectation formation mechanism of economic agents. In particular, whether expectations are rational or adaptive, homogenous or heterogenous is an important factor that affects its effectiveness. We examine underlying mechanism of Japanese consumers’ inflation expectations by analyzing the raw data of “Consumer Confidence Survey”. From the data, we find that both statistically significant upward bias and disagreement among households exist in a persistent manner. Our study shows that“Model of asymmetric cost of forecast error” is consistent with this upward bias, while a gap remains from the level of rational expectation. In addition, we offer the empirical evidence that expectation heterogeneity among various groups can be explained with their characteristics only to a limited extent. Among others, we find that the age effect on inflation expectations looks inverted U-shaped.

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