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Graduate School of International Management, Yokohama City University

Professor, Graduate School of International Management, Yokohama City University
Visiting Professor, Graduate School of Economics and Management, Tohoku University

Graduate School of International Management, Yokohama City University

Many central banks, including the Bank of Japan, define price stability as 2% inflation. Do households agree? We answer this question with a conjoint experiment in which Japanese respondents chose between hypothetical economies that differed in their inflation and unemployment rates. We find that households prefer zero inflation. An economy with 2% inflation is chosen significantly less often than one with 0% inflation. On average, respondents are indifferent between 0% and −2% inflation, although men and younger respondents prefer 0% to deflation. We also find that households weigh unemployment more heavily than inflation: for a one-percentagepoint fall in inflation, they accept a rise in unemployment of only about 0.65 percentage points. The results point to a gap between the inflation rate households prefer and the 2% that the Bank of Japan targets. This gap raises the possibility that the weak anchoring of Japanese households’ inflation expectations at 2% partly reflects their preference for inflation closer to zero.(JEL Classification: E31; E52; E58)