Comment on “The Evolution of Inflation Expectations in Japan”

Abstract

The basic idea of Fukuda and Soma (2025) is that the variation in inflation expectations among forecasters is due to their differing forecasts about future output gaps, crude oil prices, and exchange rates. They find that factors like the output gap can explain some of the variation in inflation expectations, but not the majority. Specifically, Fukuda and Soma's (2025) table 2 indicates an R ² around 0.3, suggesting that other hidden variables may play a more significant role in determining the variation in inflation expectations.

In the spring of 2022, economists had two conflicting views when inflation rates began to rise. One view was that the increase in import prices would eventually stop, and when that happened, the rise in domestic prices would also cease (referred to as the “transitory” view). The other view was that domestic prices would continue to rise even after import prices stopped rising (referred to as the “persistent” view). In other words, there was a difference in consumer price index (CPI) inflation expectations depending on whether or not the increase in import prices would permanently impact domestic prices. The sources of such a variation in inflation expectations are not considered in Fukuda and Soma (2025).

In addition, according to Diamond et al. (2020), an individual's expectations of inflation are influenced by the inflation they have experienced in their lifetime. Even among the forecasters participating in the ESP Survey, there are different generations. For example, those who experienced high inflation in the 1970s may have higher inflation expectations, while those who grew up during deflation in the 1990s may have lower inflation expectations. This source of variation in inflation expectations is also not considered in Fukuda and Soma (2025).

The critical point is whether the forecasters' expectations are aligned with the Bank of Japan's (BOJ's) target of 2%. Figure 1 displays the distribution of inflation expectations from around 40 forecasters who participated in the ESP survey. The forecasts were made in September each year (specifically, September 2021, September 2022, September 2023, and September 2024). Their predictions for the inflation rate for the upcoming fiscal year were considered for each forecast time. For example, in September 2021, before inflation began in Japan, the mode of distribution was 0.6%, indicating that most forecasters were predicting an inflation rate close to 0%. However, over time, the distribution has gradually shifted to the right. The most recent survey results from September 2024 show that the mode of distribution is 1.8% to 1.9%, which is quite close to the BOJ's target of 2%. Nonetheless, there is still a significant variation in inflation forecasts, with some forecasters predicting inflation significantly below 2% and others predicting inflation above 2%. This indicates that the forecasters' inflation forecasts have not yet been fully anchored at 2%.

If we apply the method developed by Fukuda and Soma (2025) to account for differences in the forecasts of the output gap and other factors, the shape and position of the distribution may change slightly. However, since their estimates have a small R-squared, the change will likely be minimal. It is unclear where the remaining variation in inflation expectations in September 2024 comes from. Nevertheless, it seems undeniable that, as of September 2024, the ESP Survey participants' inflation expectations are anchored, if not fully, to the BOJ's 2.