The Anchoring of Inflation Expectations in Japan: A Learning-Approach Perspective

This paper employs a model of learning about long-term inflation to jointly estimate long-term inflation expectations and the degree to which they have been anchored to the 2 percent inflation mark over the last half century in Japan. The estimated model shows that long-term inflation expectations declined to about 2 percent in the late 1980s and remained anchored to the 2 percent mark until the mid-1990s. They fell below 2 percent in the late 1990s, which resulted in a low degree of anchoring until the early 2010s. Following the introduction of the price stability target of 2 percent and the launch of Qualitative and Quantitative Monetary Easing in early 2013, inflation expectations rose until early 2015, but have not yet been anchored to the target. A further VAR analysis demonstrates that markups in domestic goods and services markets are one important reason why expectations have not been anchored at 2 percent since the late 1990s.