Comment on “Chronic Deflation in Japan”

• Author: Andrew Levin
• Date: 01 January 2014
• Published date: 01 January 2014
• DOI: http://doi.org/10.1111/aepr.12043

Comment on “Chronic Deflation in Japan”

Andrew LEVIN†

International Monetary Fund

JEL codes: E51, E58, O53

Nishizaki et al. (2014) have provided a comprehensive survey of the factors that may

have contributed to the phenomenon of chronic deflation in Japan. Indeed, this topic is

highly relevant for monetary economists and policymakers, not only for understanding

specific developments in Japan, but for shedding light on the evolution of inflation

expectations and the dynamics of actual inflation in advanced economies more generally.

I will focus this comment on highlighting a few key lessons and underscoring several sig-

nificant issues that merit further research.

Central banks have a fundamental responsibility to establish and maintain a nominal

anchor for the economy,which may be expressed in terms of the price level, the exchange

rate, or some other nominal variable. In that regard, this paper provides a very useful

chronology of the Bank of Japan’s (BoJ) communications over the past two decades

regarding its formulation of the nominal anchor. As of 1996, the BoJ’s stated intention

was “preventing inflation or deflation of domestic prices,” in effect keeping the true

underlying rate of inflation close to zero and hence aiming at modestly positive levels for

published measures of inflation. In 2006, the nominal anchor was framed more specifi-

cally in terms of year-to-year changes in the consumer price index (CPI), and BoJ com-

munications pointed to a value of 1% as the midpoint of policy board members’ views.

In 2012, the BoJ announced an explicit numerical inflation goal of 1% “for the time

being,”and earlier this year the goal was revised upwards to 2%.

In analyzing the early experience of several inflation targeting central banks,

Bernanke et al. (1999) found that the private sector’s longer term inflation expectations

tend to move only gradually in response to the announcement of an explicit inflation

target. Moreover, such patterns do not necessarily reflect sluggish information flows or

irrationality; rather, even professional forecasters tend to take a“wait-and-see” approach

in assessing the extent to which a significant institutional change is likely to be durable

over time (Evans & Wachtel, 1993). As shown in Nishizaki etal.’s (2014) figure 4, these

considerations appear to have been relevant at several key phases of the Japanese experi-

ence. In particular, Consensus Forecast surveys indicate that longer run inflation

This commentary was prepared for the Seventeenth Asian Economic Policy Review Conference

held in Tokyoon July 13, 2013. The author is currently on leave from the Federal Reserve Board as

a research fellow in the Research Department at the International Monetary Fund. The views

expressed here are solely those of the author and should not be interpreted as reflecting the views

of the Federal Reserve Board or the International Monetary Fund.

†Correspondence: Andrew Levin, International Monetary Fund, 700 19th Street NW, Washington

DC, WA 20431, USA. Email: alevin@imf.org

bs_bs_banner

doi: 10.1111/aepr.12043 Asian Economic Policy Review (2014) 9, 42–43

© 2014 The Author

Asian Economic Policy Review © 2014 Japan Center for Economic Research

42