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Extracting Firms' Short-Term Inflation Expectations from the Economy Watchers Survey Using Text Analysis

October 15, 2021

  • Jouchi Nakajima*1
  • Hiroaki Yamagata*2
  • Tatsushi Okuda*3
  • Shinnosuke Katsuki*4
  • Takeshi Shinohara*5

Abstract

This paper discusses the Price Sentiment Index (PSI), a quantitative indicator of firms' outlook for general prices proposed by Otaka and Kan (2018). The PSI is developed from the textual data of the Economy Watchers Survey conducted by the Cabinet Office; it is computed by extracting firms' views from survey comments, using text analysis. In this paper, we revisit the PSI and quantitatively analyze the determinants of changes in the PSI and the relationship between the PSI and macroeconomic variables. We also address a shortcoming in the text analysis used for computing the PSI that we discover when examining the performance of the PSI since the COVID-19 outbreak. The results of our analyses show that the PSI tends to precede consumer prices by several months and that it reflects various factors affecting price developments, including demand factors associated with the business cycle and cost factors such as changes in raw materials prices and exchange rates. Our analysis suggests that the PSI is a useful monthly indicator of inflation expectations, in that it captures the price-setting stance of firms responding to the Economy Watchers Survey. While the PSI is subject to large short-term fluctuations, it can be used to complement other indicators used for the analysis of price developments such as the output gap, existing indicators of inflation expectations, and anecdotal information from various sources.

JEL classification
C53, C55, E31, E37.

Keywords
Inflation Expectations, Machine Learning, Text Analysis, Big Data.

The authors thank Kosuke Aoki, Ryo Jinnai, Seisaku Kameda, Kazushige Kamiyama, Takuji Kawamoto, Ichiro Muto, Takashi Nagahata, Teppei Nagano, Koji Nakamura, Koji Takahashi, and staff members of the Bank of Japan for their valuable comments. The authors are also grateful to Rina Matsukura for assistance. Any remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

  1. *1Research and Statistics Department, Bank of Japan
    E-mail: jouchi.nakajima@boj.or.jp
  2. *2Research and Statistics Department, Bank of Japan
    E-mail: hiroaki.yamagata@boj.or.jp
  3. *3Research and Statistics Department (currently at the Financial System and Bank Examination Department), Bank of Japan
    E-mail: tatsushi.okuda@boj.or.jp
  4. *4Research and Statistics Department (currently at the Institute for Monetary and Economic Studies), Bank of Japan
    E-mail: shinnosuke.katsuki@boj.or.jp
  5. *5Research and Statistics Department (currently at the Institute for Monetary and Economic Studies), Bank of Japan
    E-mail: takeshi.shinohara@boj.or.jp

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