Inflation Expectations in Japan during Unconventional Monetary Policy and Pandemic Periods

The COVID-19 pandemic ended a long period of subdued inflation in Japan and renewed attention to the role of expectations in the transmission of monetary policy. This paper analyzes how Japanese households formed inflation expectations between 2006 and 2022, focusing on periods of unconventional monetary policy and the pandemic shock. Using a structural vector autoregressive framework with Bayesian estimation, we examine the joint role of global energy prices, broad money growth, long-term government bond yields, and the nominal effective exchange rate. We find that expectations rise in response to global energy prices, broad money supply growth, and past expectations, while they decline with higher long-term bond yields or an appreciation of the yen. During Quantitative and Qualitative Easing (QQE), launched by the Bank of Japan in 2013, the impact of money supply remained significant, but the effect of bond yields weakened and operated only with a delay. Importantly, the model suggests early warning signals of rising inflation from 2021 onward, with expected inflation shifting during the pandemic from near zero to around 0.5 percent per quarter. These findings highlight the importance of monitoring household surveys, the continued relevance of monetary aggregates, and the limits of interest-rate channels in managing inflation expectations in Japan, while also underscoring the role of financial intermediation and banks in transmitting shocks to the broader economy.