Inflation, expectation, and the real economy in Japan

This paper investigates the effectiveness of unconventional monetary policy in Japan by taking into account people's price expectations. First, a stability test revealed that the effects of the 2011 earthquake were not strong enough to have caused a structural break in the economy. Second, the impulse response analysis reveals that an expansionary policy has a temporary, positive effect on financial and real economic variables. However, the inflation rate does not increase to a statistically significant level from zero. Third, market participants' expectation of a devaluation of the yen occurs in advance of an actual increase in the monetary base.