Discussion Papers 2025

Fukuda, Shin-ichi and Naoto Soma

The purpose of this study is to examine how short-term and medium-term inflation expectations evolved on a sustained basis in Japan. In the analysis, we define the "anchor of inflation expectations" as inflation expectations excluding the expected effects of the GDP gap and supply shocks. We examine the extent to which the "anchor of inflation expectations" has changed since 2010 using Japanese forecaster-level data in the "ESP Forecast." The estimated anchor of inflation expectations increased significantly after the Bank of Japan launched unprecedented monetary easing in April 2013. However, the increase was not only modest but also temporary. In contrast, the estimated anchor continued to rise after the global supply shocks became noticeable in April 2022. The estimated anchor has already exceeded 2% for short-term inflation expectations and is approaching 2% for medium-term inflation expectations. This means that the global supply shocks and the subsequent depreciation of the yen have caused a dramatic change in inflation expectations. However, the increased anchor of medium-term inflation expectations is still about the same as in 2014-2015. Given that the upward shift did not continue in 2014-2015, the Japanese economy may not be able to achieve the 2% target on a sustainable basis unless there are additional changes, such as an improvement in consumer sentiment through real wage increases.

Keywords: Inflation target, Unconventional monetary policy, Global supply shocks