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Supplementary Paper Series for the "Comprehensive Assessment" (4): Why Did the BOJ Not Achieve the 2 Percent Inflation Target with a Time Horizon of About Two Years? -- Examination by Time Series Analysis --

July 28, 2017
Takuji Kawamoto*1
Moe Nakahama*2


This paper explores why the inflation rate of CPI -- which excludes volatile fresh foods -- failed to reach the 2 percent "price stability target" even after more than three years had passed since the Bank of Japan (BOJ) introduced the Quantitative and Qualitative Monetary Easing (QQE) in April 2013. Specifically, we provide empirical evidence for what factors caused the actual CPI inflation rate to fall short of the BOJ's original forecast made in April 2013, by using historical decomposition technique of simple VAR analysis. The empirical results show that among the deviation of the CPI inflation rate for fiscal 2015 from the original forecast of minus 1.9 percentage points -- the difference between the forecast of 1.9 percent and the actual result of 0.0 percent -- about 50 percent (minus 1.0 percentage points) can be attributed to the unexpected decline in oil prices. A little more than 10 percent (minus 0.3 percentage points) can be explained by the unexpected slump in output gap and a little more than 30 percent (minus 0.7 percentage points) by inflation-specific negative shocks. These inflation-specific negative shocks are measured as declines in the inflation rate which cannot be explained by fluctuations in the output gap, oil prices, and the nominal exchange rate, and thus imply that inflation expectations did not rise as much as originally anticipated by the BOJ.

JEL Classification
C32; E31; E52

Monetary Policy; Inflation; Inflation Expectations; VAR

This paper is a supplement to "Comprehensive Assessment: Developments in Economic Activity and Prices as well as Policy Effects since the Introduction of Quantitative and Qualitative Monetary Easing (QQE)" released by the Bank of Japan in September 2016. We are grateful to Toshitaka Sekine, Koji Nakamura, Yoshihiko Hogen and other BOJ staff for helpful comments and suggestions. Special thanks to Hiroshi Kawata for his data support. All remaining errors are, of course, our own.

  1. *1Research and Statistics Department, Bank of Japan (currently at the Financial System and Bank Examination Department)
  2. *2Research and Statistics Department, Bank of Japan


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