1 Examination of policy effect using calculated inflation expectation by Inflation-indexed bonds 1 Yasuyuki Komaki 2 , Abstract After return to power on fall 2012 in Japan, Prime Minister Abe has argued that we adopt a three-pronged strategy consisting of bold monetary policy, flexible fiscal policy and a growth strategy that promotes private investment in order to slough off deflation economy in Japan. We call a series of policy as Abenomics. In this study, we estimate the effect of Abenomics using expected inflation rate (hereafter BEI) which we calculate from Inflation-indexed bonds. We confirm Abenomics make expected inflation climb significantly. But we find the effect of easing policy under previous administration is larger than Abenomics. We suppose the rise of expected inflation in Abenomics is caused by our expectation affected by the change of government mainly. We put our hopes to previous administration too much. After change from Democratic Party Government on Sept 2009, we expected that Japanese old system was improved and economy recovered immediately. But we disappointed the Democratic Party Government largely. So we desire that return to power lead to better situation than previous. At the moment, we come out of wildly excitement for Abenomics. In fact, after May 2013, expected inflation level off or is rather decline. But we have only 20% of outstanding in the current market. We should pay attention to use BEI as the expected inflation, as it is not possible fully to make the adequate price formation. JEL Classification:E31,E52,E62 Key words: Expected inflation rate, inflation-indexed bond, Abenomics 1 We thank Takahiro Niimi (NLI research) for providing basic data of Inflation-indexed bonds to me in this study. This work is supported by Grants-in-Aid for Scientific Research (22530281). 2 Nihon University, College of Economics. 1-3-2, Misaki-cho, Chiyoda-ku, Tokyo, Japan E-mail; [email protected], Phone; +81-3-3219-3410
18
Embed
Examination of policy effect using calculated inflation ......relation to inflation; price expectation in Consumer Confidence Survey, price forecast of ESP and Tankan. But these indexes
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
1
Examination of policy effect using calculated inflation expectation by Inflation-indexed bonds1
Yasuyuki Komaki2,
Abstract After return to power on fall 2012 in Japan, Prime Minister Abe has argued that we
adopt a three-pronged strategy consisting of bold monetary policy, flexible fiscal policy and a growth strategy that promotes private investment in order to slough off deflation economy in Japan. We call a series of policy as Abenomics. In this study, we estimate the effect of Abenomics using expected inflation rate (hereafter BEI) which we calculate from Inflation-indexed bonds.
We confirm Abenomics make expected inflation climb significantly. But we find the effect of easing policy under previous administration is larger than Abenomics.
We suppose the rise of expected inflation in Abenomics is caused by our expectation affected by the change of government mainly. We put our hopes to previous administration too much. After change from Democratic Party Government on Sept 2009, we expected that Japanese old system was improved and economy recovered immediately. But we disappointed the Democratic Party Government largely. So we desire that return to power lead to better situation than previous. At the moment, we come out of wildly excitement for Abenomics. In fact, after May 2013, expected inflation level off or is rather decline.
But we have only 20% of outstanding in the current market. We should pay attention to use BEI as the expected inflation, as it is not possible fully to make the adequate price formation. JEL Classification:E31,E52,E62 Key words: Expected inflation rate, inflation-indexed bond, Abenomics
1 We thank Takahiro Niimi (NLI research) for providing basic data of Inflation-indexed bonds to me in this study. This work is supported by Grants-in-Aid for Scientific Research (22530281). 2 Nihon University, College of Economics. 1-3-2,Misaki-cho, Chiyoda-ku, Tokyo, Japan E-mail; [email protected], Phone; +81-3-3219-3410
2
1 Introduction After the change of government on fall 2012 in Japan, Prime Minister Abe
has argued that we adopt a three-pronged strategy consisting of bold monetary policy, flexible fiscal policy and a growth strategy that promotes private investment in order to slough off deflation economy in Japan. We call a series of policy as Abenomics. Especially, we pay attention to whether deflation economy will be slough off after bold monetary policy on April 2013. Bank of Japan (hereafter BOJ) set our objective to raise CPI in order to achieve the "price stability target" of 2 percent at the earliest possible time.
We estimate the expected inflation rate in order to judge whether monetary policy gives rise to around 2% inflation using break even inflation (BEI) rate calculated by Inflation-indexed bonds and nominal government bond. We take three points into account in order to examine the effect of Abenomics.
First, we use BEI rate because BEI is daily data. There are many indexes in relation to inflation; price expectation in Consumer Confidence Survey, price forecast of ESP and Tankan. But these indexes are quarterly or monthly statistics. We are not able to distinguish the effect of monetary policy only into other factors such as supply shock, when expected inflation rate raise in case of quarterly or monthly statistics. When we use daily BEI rate, we estimate the effect of change in monetary policy and in financial market.
Second, we compare the estimation of Abenomics easing monetary policy with of Democratic Party administration3 (hereafter previous administration) because both previous administration and Abenomics adapted the similar powerful easing monetary policy, as the following.
In previous administration, zero interest rate and quantity easing policy had adopted again on Oct 2010 as a comprehensive monetary easing policy composed of establishing, as a temporary measure, a program on its balance sheet to purchase various financial assets, such as government securities, commercial paper (CP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs) and to conduct the fixed-rate funds-supplying operation. And BOJ introduced a kind of inflation targeting policy on Feb 2012. In the concrete, BOJ judges "the price stability goal in the medium to long term" to be within a positive range of 2 percent or lower in terms of the year-on-year rate of change in the CPI and, more pacifically, sets a goal at 1 percent for the time being. 3 Democratic administration is from Sep 16, 2009 to Dec 25, 2012.
3
In case of Abenomics, BOJ adopted bold quantity easing and inflation targeting policy clearly in order to achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. And bold quantity easing will double the monetary base.
At last, we will distinguish three components in Abenomics. Abenomics consist of three components; bold monetary policy, flexible fiscal policy and a growth strategy. The expected inflation rate seems to be affected by all Abenomics policy. Especially, we also examine why stock price and foreign exchange rate reached peak after May 2013.
The rest of this paper is organized as follows. Section 2 shows the state of price indexed bond and we explain the Abenomics in section 3. We use BEI rate in Section 4 to examine the effect of the expected inflation for Abenomics and the previous administration. Section 5 concludes. 2.The state of Inflation-indexed bonds
Inflation-indexed bonds are able to reduce the inflation risk, as the principal and coupon increase according to inflation.UK have issued this bond since 1981. In Japan this bond has been issued 16 times until Aug 2008. After Lehman shock (Bankruptcy of Lehman Brothers), this bond suspended temporally because financial market got worse. But Inflation-indexed bonds have reopened since Oct 2013 as financial markets improve. We regard the difference which we calculate from Inflation-indexed bonds and nominal government bonds as the expected inflation rate4.
We find BEI has upward trend from around 0.9% on early 2013 to around 2.0% on May 2013 after Abenomics has attracted a great deal of public attention. But we also find BEI has already risen from around -0.3% on Aug 2011 to around 0.7% on May 2012 under previous administration (see Figure 1).
As redemption of Inflation-indexed bonds is made by bringing the redemption date forward or retirement by purchase, we have only 20% of outstanding in the current market. We should pay attention to use BEI as the expected inflation, as it is not adequate fully to make the price formation (see Table 1). We use the bond which issued after 6 times bond in this study.
4 BEI is not necessarily actual inflation rate because BEI include inflation risk premium. In this study, we take no account of risk premium.
4
3. Abenomics We regard Abenomics as the rehabilitation plan for Japanese economy
which have suffered from deflation for a long time. Abenomics consist of three components; bold monetary policy, flexible fiscal policy and a growth strategy that promotes private investment in order to slough off deflation economy in Japan. Though the starting point of Abenomics is the presidential election of Liberal Democratic Party, we assume the starting points is the question time which former prime minster Noda insist on dissolution of the lower house of parliament on Nov 14, 2012 in this study (see Table 2). 3.1 Bold Monetary Policy
“We need bold monetary policy in order to slough off the deflation” Mr. Abe Shinzou spoke on Nov 15 2012. At that time, we demanded a quite different policy for developing economy. Mr. Kuroda Haruhiko took office as president of BOJ on March, 20 2013 and he introduced "Quantitative and Qualitative Monetary Easing" for his first monetary policy meeting on April 4, 2013.
The special feature of "Quantitative and Qualitative Monetary Easing" is the following.
1) The introduction of inflation targeting policy with clear target, deadline. BOJ decided to triple 2 goals. BOJ will supply double the monetary base in order to achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index within 2 years.
2) The temporary suspension of the "banknote principle". BOJ will temporarily suspend the so-called banknote principle. This principle indicates that the purchases of JGBs conducted for facilitating money market operations are subject to the limitation that the outstanding amount of long-term government bonds effectively held by BOJ be kept below the outstanding balance of banknotes issued. It was decided at the Monetary Policy Meeting held on March 19, 2001.
But this policy is a quite new and different policy? It is possible to regard
this policy as almost similar policy at previous administration. In previous administration, zero interest rate and quantity easing policy had adopted again on Oct 5, 2010 as a comprehensive monetary easing policy composed of establishing, as a temporary measure, a program on its balance sheet to purchase various financial assets, such as government securities, commercial
5
paper (CP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs) and to conduct the fixed-rate funds-supplying operation. And BOJ introduced a kind of inflation targeting policy on Feb 14, 2012. In the concrete, BOJ judges "the price stability goal in the medium to long term" to be within a positive range of 2 percent or lower in terms of the year-on-year rate of change in the CPI and, more specifically, sets a goal at 1 percent for the time being.
Compared policy between previous and Abenomics, we find BOJ shows volition to archive the goals by all means such as unlimited monetary base. Based on such recognition, we estimate the policy on two periods in this study (see Table 3). 3.2 Flexible Fiscal Policy
After The Junichi Koizumi administration on April 2001, public investment had decreased largely (see Figure 2). But taking opportunity of huge earthquake on March 2011 and tunnel collapse on Dec 2012, we re-recognize the necessity of public investment in order to protect disaster and maintain the public stock.
The Abe administration concluded Building National Resilience Law and made the positive budget. The budget of public investment was organized on large scale especially such as 20.2 trillion yen Emergency Economic package on Jan 11, 2013.
Taking thought of huge budget deficit in Japan, we suppose budget state grow more serious. 3.3 Growth Strategy
In order for Japan’s economy to achieve more than a recovery and continue stable, long-term growth, it is essential to strengthen Japan’s growth potential by implementing a growth strategy that promotes private investment and increasing labor productivity, while also bringing to the surface potential domestic and overseas demand. In this time, the plan of growth strategy open to public such as inflection of female labor, reform of agriculture system and deregulation.
But these plans are similar with former plans and concrete plans of growth strategy don’t show up to now. 4.Influence for expected inflation in Abenomics
We estimate the effect of Abenomics using the expected inflation rate. As we,
6
market participants and policy maker such as BOJ, recognize the rise of expected inflation rate indicates not only real interest decline but also good economic activity, we attach great important to change in expected inflation rate.
As earlier studies mentioned, change in price is caused by several factors such as output gap, supply shock and monetary policy (Higo and Kuroda [2000], Takeda and Yajima [2004]). In this study, we use event-study method and daily data in order to extract the effect of monetary policy only from several factors in price. 4.1 Model and Data
We estimate fluctuation factor in the expected inflation (BEI) rate using autoregressive and several market variables, as the factors of fluctuation in BEI include policy variables, market variables such as stock price and foreign exchange rate. As above mentioned, Abenomics consists of fiscal policy and growth strategy also. So we use market variables as control variables in order to get rid of news about Abenomics such as short-term rate (TIBOR 3ms) rate, stock price (Nikkei 225) and foreign exchange rate (FOX). We use inflation-indexed bond after 6 issue number, so estimation period is from each Inflation-indexed bonds issue date to Sept 10. 2013.
Regarding to the direct effect of Abenomics, we use dummy variables which put on 1 after just news release affected by Abenomics, and which put on zero before release including articles in newspapers (see Table 2, Table 3). We use logarithmic conversion data with 5 days lag, as the data in estimation equation are checked by unit-root test and AIC test.
We estimate BEI equation as follow; log(BEIt) = Constant
+�αjDjt +�βlog(Tibor3mst) + �γlog(Nikke225t)j
+�δlog(Foxt)
where Dji are dummy variables which put on 1 after just news release day t = j affected by Abenomics (see Table 4).
Whether this equation meets the conditions, we examine Breusch-Godfrey Serial Correlation LM Test for serial correlation and Breusch-Pagan-Godfrey test for heterogeneous dispersion. 4.2 Effect of Monetary Policy
7
We find around 1.4~1.7% (1.1~1.6% in case of including call rate) in expected inflation rate was climbed by monetary policy under previous administration in all unexpectedly. But we also check the decline of expected inflation immediately after policy change. It is possible to insist that policy change run counter to our expectations (see Table 5 and Table 7).
On the other hand, after Abenomics, around 0.9~1.5% (0.9~1.3% in case of including call rate) in expected inflation rate was climbed in all unexpectedly. But when we estimate until April 2013, we find the effect of monetary policy is larger than previous. Expected inflation rate rose around 1.1~1.9%. After May 2013, the effect diminished because we disappointed to Abenomics little by little (see Table 8). 4.3 Other Abenomics effect
We find it is largest for expected inflation to be affected by the change of government. And among Abenomics, monetary policy leads to raise expected inflation largely. But fiscal policy and growth strategy make expected inflation decline because of reflecting our disappointment to Abenomics, we suppose (see Table 6 and Table 9). 5. Brief remarks
We confirm Abenomics make expected inflation climb significantly. But we find the effect of easing policy under previous administration is larger than Abenomics. We suppose this reason is caused by our expectation affected by the change of government mainly.
We put our hopes to previous administration too much. After change from Liberal Democratic Party Government on Sept 2009, we expected that Japanese old system was improved and economy recovered immediately. But we disappointed the Democratic Party Government largely. So we desire that return to power lead to better situation than previous. At the moment, we come out of wildly excitement for Abenomics. In fact, after May 2013, expected inflation level off or is rather decline.
As section 2 mentioned, we have only 20% of outstanding in the current market. We should pay attention to use BEI as the expected inflation, as it is not adequate fully to make the price formation.
8
Reference 1. Bureau of Economic Analysis, 2011, “Concepts and Methods of the U.S. National
Income and Product Accounts”, Chapter 4: Estimating methods, 423. 2. Bureau of Labor Statistics, 1998, “BLS to maintain current reference base of
1982-84=100 for most CPI index series”, News release, January 13, 1998.
3. European Central Bank, 2003, “Background Studies for the ECB's Evaluation of its Monetary Policy Strategy”, pp.32-34, 18 Nov 2003.
4. Eurostat, 2005, “New reference year 2005=100 for Harmonized Indices of Consumer Prices”, News release, 146/2005, Nov 16, 2005.
5. Fukuda.S and Kei. S, 2002, “The impact of Fiscal Policy in Japan using event study”, Sep 2002. (in Japanese)
6. Higo. M and Kuroda. S, 2000, “Decision Factors of Price fluctuation”, BOJ Institute for Monetary and Economic Studies, Monetary and Economic Studies, March 2000. (in Japanese)
7. Ichihashi. H and Hasegawa. M, 2012, “Study of Chain-linked CPI”, Cabinet Office, Discussion Paper, DP/12-01, March 2012. (in Japanese)
8. Kitamura. N, 2006, “The Estimation of Inflation-indexed Bond based information in current bond market”, Japan Bond trading, Dec 20, 2006. (in Japanese)
9. Komaki. Y, 2011, “The effect of CPI rebase for Monetary Policy”, Nihon University, College of Economics, Working Paper, No.11-01. (in Japanese)
10. Mankiw, N. G. and Shapiro, M.D. (1986). News or Noise? An Analysis of GNP Revisions. NBER Working Papers 1939.
11. Mishkin, Frederic S, 2007, “Headline versus Core Inflation in the Conduct of Monetary Policy,” Speech presented at the Business Cycles, International Transmission and Macroeconomic Policies Conference, HEC Montreal, Montreal, Canada, October 20, 2007.
12. Miwa. H and Maruyama. Y, 2011, “The possibility of added easing Monetary Policy”, Economic Monitor, No.2010-008. (in Japanese)
13. Bank of Japan, 2000, “Problems for Price Index”, Aug 2, 2000. (in Japanese) 14. Bank of Japan, 2007, “Results of Revision in 2005 based Corporate Goods Price
Index”, Dec 2007. (in Japanese) 15. Office for National statistics (ONS), 2005, “Consumer Prices Index to be rebased
in February”, News Release, Dec 13, 2005.
16. Shiratsuka. S, 1998, “Economic analysis for Price”, Tokyo University Publisher. (in Japanese)
9
17. Statistics Canada, 2011, “Detailed information for December 2011”. 18. Statistics Sweden, 2006, “Index numbers with two decimals from 2006”,
2006-02-14.
19. Takeda. Y and Yajima.Y, 2004, “Inflation-indexed bond as the expected inflation rate – Lesson from UK and USA-“, NLI research. (in Japanese)
20. The Boskin Commission Report, 1996, “Toward A More Accurate Measure of the Cost Of Living,” Dec 4, 1996.
21. Ukai.H and Sonoda.K, 2006, “Price index used by explanation of Monetary Policy”, BOJ Review, 2006-J-2. (in Japanese)
10
Figure 1: Break Even inflation rate of each issue number
Figure 2: Public investment as percentage of nominal GDP