Japan's Inflation Dynamics and Agents' Behavior

Abstract

This paper is prepared for the opening session of the Sixth Joint Conference organized by the University of Tokyo Center for Advanced Research in Finance (CARF) and the Bank of Japan (BOJ) Research and Statistics Department. Japan’s economy seemed to be in the process of escaping from the prolonged deflationary phase and moving on to a mild inflationary phase. In this study, we first review the recent developments and discussions of Japan’s inflation. We elaborate how agents’ expectations and firms’ pricing strategies relate to the inflation dynamics. We then argue how firms and households are likely to change their behavior under the inflationary phase. We focus on the Japan’s recent wage developments, and raise issues that will be important to discuss the future developments of the real wage. Furthermore, we discuss how Japan’s households will change their portfolio choices, in which cash holding yet plays a central role, under the inflationary environment.