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Uncertainty in the Formation of Inflation Expectations in Japan: An Analysis Using the Macroeconomic Model Q-JEM

日本語

February 19, 2025
Ichiro Fukunaga*1
Yui Kishaba*2
Nao Shibata*3
Shunichi Yoneyama*4

Abstract

This paper examines the formation mechanism of medium- to long-term inflation expectations in Japan using the Bank of Japan's large-scale macroeconomic model, the Quarterly Japanese Economic Model (Q-JEM), from the perspective of the model's past forecast accuracy and its assessment of future uncertainty. We compare the forecast accuracy of various specifications of the inflation expectations function in the model, and find that specifications that take into account the mechanism of adaptive expectations, which is influenced by past actual values of inflation, provided relatively high forecast accuracy on average since 2013. However, the relative forecast accuracy between different specifications varied from phase to phase, suggesting a large uncertainty in the expectations formation mechanism itself. We also assess the future uncertainty of inflation expectations based on the model's past forecast errors. Under the assumption of adaptive expectations mechanism, inflation expectations are more likely to rise when the recent actual inflation is higher.

JEL classification
C53, E31, E37, E52

Keywords
inflation expectations, monetary policy, large-scale macroeconomic model

We received valuable comments from Kosuke Aoki, Ryo Jinnai, Toyoichiro Shirota, and Bank of Japan staff. Haruhiko Inatsugu, Kakuho Furukawa, Yusuke Takahashi, Kimihiko Izawa, and Kana Hagihara also contributed to this research project especially in the early stage, including the literature survey. Ichiro Muto and Koji Takahashi helped us in reproducing old versions of Q-JEM. We had fruitful discussions with Oscar Arce, Chiara Osbat, Matthieu Darracq Paries, William Wascher, and other colleagues in the European Central Bank and the Federal Reserve Board, including on the specification of inflation expectations function in macroeconomic models and its implication for inflation forecast. We would like to express our gratitude to all of them. Any remaining errors are attributable to the authors. 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 : ichirou.fukunaga@boj.or.jp
  2. *2Research and Statistics Department, Bank of Japan
    E-mail : yui.kishaba@boj.or.jp
  3. *3Research and Statistics Department, Bank of Japan
    E-mail : nao.shibata@boj.or.jp
  4. *4Research and Statistics Department, Bank of Japan
    E-mail : shunichi.yoneyama@boj.or.jp

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