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Price expectations and consumption under deflation: evidence from Japanese household survey data


The Japanese economy has experienced price deflation since the mid-1990s. Despite the importance of overcoming deflation, there has been little recent research on price expectations in Japan. This paper takes advantage of an original and rich quarterly household-level data set from the “Kokumin Seikatsu Monitors” to estimate average price expectations, examine the factors that affect price expectations, and examine how changes in price expectations have affected household consumption. Our estimates indicate that average price expectations ranged from minus 0.2 to 0% in 2001 and 2002. However, there was an increase to 1% in the first quarter of 2003, followed by a decline to 0.2% in the second quarter, and a steady increase toward 0.8% by the first quarter of 2004. Price expectations depend on current price movements and lagged expectations. A series of quantitative easing monetary policies were not very effective in changing the price expectations, since the policy announcements caused revision of price expectations only for a small portion, i.e., 5–10% of people surveyed. The jump observed in the first quarter of 2003 was a reaction to the outbreak of the Iraq war. Our study also confirms that deflationary expectations discourage household consumption, mainly durable consumption, by delaying the timing of purchases, suggesting that the deflationary expectations should be upwardly revised to restore a vital Japanese economy.

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  1. 1.

    For the method of calculating price expectations from inflation indexed bond data, see Kitamura (2004).

  2. 2.

    A merit of the expectation-augmented Phillips curve estimation is its application to measure structural changes in price expectations. Shimizutani and Yogi (2005) focus on an unusual experience in Okinawan history to evaluate the impact of devaluation on inflation expectations.

  3. 3.

    Previous studies based on the Carlson–Parkin method are reviewed in Hori and Shimizutani (2003). Fukuda and Keida (2001) found that the performance of the estimated Phillips curve in Japan improves by adding the expectation term obtained from the C–P method.

  4. 4.

    Roberts (1998) used the two surveys to examine the formation of expectations and conclude that expectations are neither perfectly rational nor as unsophisticated as simple autoregressive models. More recent work by Carroll (2003) employs the Mankiw and Reis (2001, 2002) methodology to show empirically that household expectations are not rational.

  5. 5.

    There are 47 prefectures in Japan.

  6. 6.

    In general, the number of applicants is larger than that of openings. Each prefecture contracts with selected respondents to answer eight questionnaires and pays 12,000 yen (about US$100) per year.

  7. 7.

    A pre-survey that contains similar questions was performed in the first quarter of 2001.

  8. 8.

    We also tried to calculate price expectations based on the median of multiple choices excluding (1) and (10), and found that the estimates based on the median of multiple choices are almost the same as those based on actual figures. We rely on the responses in (B) rather than (C) since it is difficult to justify why the median of each choice is taken and what figures should be allocated for choices (1) and (10). Therefore, our analyses will depend on the data obtained from the actual figures, and the responses to the multiple choices question are used just to exclude contradictory observations.

  9. 9.

    One might suspect that some sample changes are causing observed trends. To address this, we also plotted a figure based on the households that responded in all twelve surveys. The observed trends in Fig. 3 are similar to those in Fig. 2.

  10. 10.

    The same questions were also asked in the second to fourth quarter in 2001, with similar results.

  11. 11.

    The information on household characteristics are obtained once in every fiscal year.

  12. 12.

    For the cases of the panel regressions below, we assume the same households, who once answered they knew a policy change, also knew the following changes, and allocate ones for them. This rule is also applied to the “Revision Dummy”.

  13. 13.

    The survey assumes that all respondents knew about those exogenous events.

  14. 14.

    This might be because the survey asks the respondents about their own income, rather than business conditions in the macroeconomic sense.

  15. 15.

    The relationship between deflation, the household balance sheet and consumption was discussed by Mishkin (1977, 1978).


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Correspondence to Satoshi Shimizutani.

Additional information

This paper is a revised version of Hori and Shimizutani (2003). We thank David Weinstein, Fumio Hayashi, Koichi Hamada, Anil Kashyap, and Yutaka Kosai for their constructive suggestions. We also appreciate useful comments from participants in the May 2004 and October 2004 conferences in Tokyo and Ann Arbor sponsored by the University of Michigan and Hitotsubashi University, as well as those in the conference “Japanese Monetary Policy: Experience and Future” (June 2004) organized by the ESRI, especially Tutomu Watanabe. Moreover, we wish to thank the Price Policy Division, especially Hitoshi Otose, Yoshio Kanda and Masaru Hadano for providing us with micro-level data from the “Kokumin Seikatsu Monitors.” The views expressed in this paper are those of the authors and do not represent those of the Cabinet Office or the Japanese government.

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Hori, M., Shimizutani, S. Price expectations and consumption under deflation: evidence from Japanese household survey data. IEEP 2, 127–151 (2005).

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  • Monetary Policy
  • Exogenous Shock
  • Current Income
  • Japanese Economy
  • Price Expectation