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Why Did the BOJ Not Achieve the 2 Percent Inflation Target with a Time Horizon of About Two Years? -- Examination by Time Series Analysis --

Author

Listed:
  • Takuji Kawamoto

    (Bank of Japan)

  • Moe Nakahama

    (Bank of Japan)

Abstract

This paper explores why the inflation rate of CPI -- which excludes volatile fresh foods -- failed to reach the 2 percent "price stability target" even after more than three years had passed since the Bank of Japan (BOJ) introduced the Quantitative and Qualitative Monetary Easing (QQE) in April 2013. Specifically, we provide empirical evidence for what factors caused the actual CPI inflation rate to fall short of the BOJ's original forecast made in April 2013, by using historical decomposition technique of simple VAR analysis. The empirical results show that among the deviation of the CPI inflation rate for fiscal 2015 from the original forecast of minus 1.9 percentage points -- the difference between the forecast of 1.9 percent and the actual result of 0.0 percent -- about 50 percent (minus 1.0 percentage points) can be attributed to the unexpected decline in oil prices. A little more than 10 percent (minus 0.3 percentage points) can be explained by the unexpected slump in output gap and a little more than 30 percent (minus 0.7 percentage points) by inflation-specific negative shocks. These inflation-specific negative shocks are measured as declines in the inflation rate which cannot be explained by fluctuations in the output gap, oil prices and the nominal exchange rate, and thus implies that inflation expectations did not rise as much as originally anticipated by the BOJ.

Suggested Citation

  • Takuji Kawamoto & Moe Nakahama, 2017. "Why Did the BOJ Not Achieve the 2 Percent Inflation Target with a Time Horizon of About Two Years? -- Examination by Time Series Analysis --," Bank of Japan Working Paper Series 17-E-10, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp17e10
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    References listed on IDEAS

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    1. Joshua K. Hausman & Johannes F. Wieland, 2015. "Overcoming the Lost Decades? Abenomics after Three Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 385-431.
    2. Christiane Baumeister & Lutz Kilian, 2016. "Understanding the Decline in the Price of Oil since June 2014," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 3(1), pages 131-158.
    3. Naoko Hara & Naohisa Hirakata & Yusuke Inomata & Satoshi Ito & Takuji Kawamoto & Takushi Kurozumi & Makoto Minegishi & Izumi Takagawa, 2006. "The New Estimates of Output Gap and Potential Growth Rate," Bank of Japan Review Series 06-E-3, Bank of Japan.
    4. Michelis, Andrea De & Iacoviello, Matteo, 2016. "Raising an inflation target: The Japanese experience with Abenomics," European Economic Review, Elsevier, vol. 88(C), pages 67-87.
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    Cited by:

    1. Matsumura, Misaki, 2022. "What price index should central banks target? An open economy analysis," Journal of International Economics, Elsevier, vol. 135(C).
    2. Lian An & Mark A. Wynne & Ren Zhang, 2020. "Shock-Dependent Exchange Rate Pass-Through: Evidence Based on a Narrative Sign Approach," Globalization Institute Working Papers 379, Federal Reserve Bank of Dallas.
    3. Ichiro Fukunaga & Yui Kishaba & Nao Shibata & Shunichi Yoneyama, 2025. "Uncertainty in the Formation of Inflation Expectations in Japan: An Analysis Using the Macroeconomic Model Q-JEM," Bank of Japan Working Paper Series 25-E-3, Bank of Japan.

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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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