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Firms' Inflation Expectations and Wage-setting Behaviors

July 29, 2016
Sohei Kaihatsu*1
Noriyuki Shiraki*2


This paper aims to examine the formation mechanism of firms' inflation expectations and the relationship between those expectations and wage-setting behaviors. We conduct an empirical analysis based on microdata constructed by matching a business survey for inflation expectations and corporate financial data. Our empirical results demonstrate that firms' short-term and medium- to long-term inflation expectations have significantly increased after the Bank of Japan introduced a price stability target of two percent and quantitative and qualitative monetary easing in 2013. During this period, dispersions of distributions of inflation expectations increased temporarily and then shrank again. These changes vary across business attributes, such as the size of a firm. Therefore, differences in business attributes might result in the heterogeneous reaction of inflation expectations to monetary policy shocks. Furthermore, an empirical analysis using the data from 2004 to 2016 shows that (a) both wages and short-term inflation expectations tend to increase along with medium- to long-term inflation expectations and (b) both wages and operating profits tend to decrease when only short-term inflation expectations increase. The result implies that a balanced economic growth between prices and wages can be achieved when there is an increase in a wide range of firms' medium- to long-term inflation expectations.

JEL Classification :
D21, D84, E31, E52

Keywords :
firm's inflation expectation, wage-setting behaviors, quantitative and qualitative monetary easing, panel VAR

We would like to thank the Bank of Japan staff for their helpful comments. The microdata from the "Annual Survey of Corporate Behavior" was provided by the Economic and Social Research Institute, Cabinet Office. The opinions expressed here, as well as any remaining errors, are those of the authors and should not be ascribed to the Bank of Japan.

  1. *1Monetary Affairs Department (currently Research and Statistics Department), Bank of Japan
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  2. *2Monetary Affairs Department (currently International Department), Bank of Japan
    E-mail :


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