BOJ study links subdued trend inflation to expectations and income
A new Bank of Japan (BOJ) working paper estimates Japan's trend inflation and its determinants. The study finds that subdued medium- to long-term inflation expectations and real income growth have exerted downward pressure on trend inflation.
Expectations anchor Japan's trend inflation
The study by Ryuichiro Hirano, Yutaro Takano, and Kosuke Takatomi estimates Japan's trend inflation and its determinants using a trend-cycle BVAR decomposition approach.
Their findings indicate that trend inflation in Japan remained subdued as the public had gradually lowered their medium- to long-term inflation expectations.
This shift in expectations followed the collapse of the asset price bubble in the early 1990s, suggesting a long-lasting impact on the economy's underlying inflation dynamics.
The research highlights the critical role of public perception and historical events in shaping the long-term inflation trajectory, emphasizing the importance of monitoring these factors for future assessments.
Real income growth adds downward pressure
The analysis further reveals that subdued real income growth also exerted downward pressure on trend inflation.
This effect was particularly pronounced during the period from the 2000s to the early 2010s, a time when trend inflation was notably restrained.
The authors specify that this subdued real income growth was relative to the labor productivity and labor supply growth, indicating a structural imbalance in economic factors.
These findings underscore the importance of monitoring both inflation expectations and broader structural economic factors for a comprehensive assessment of Japan's long-run inflation trend, suggesting these elements are crucial for policy considerations.