Extracting Firms' Short-Term Inflation Expectations from the Economy Watchers Survey Using Text Analysis

Jouchi Nakajima, Hiroaki Yamagata, Tatsushi Okuda, Shinnosuke Katsuki and Takeshi Shinohara
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Hiroaki Yamagata: Bank of Japan
Shinnosuke Katsuki: Bank of Japan
Takeshi Shinohara: Bank of Japan

No 21-E-12, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper discusses the Price Sentiment Index (PSI), a quantitative indicator of firms' outlook for general prices proposed by Otaka and Kan (2018). The PSI is developed from the textual data of the Economy Watchers Survey conducted by the Cabinet Office; it is computed by extracting firms' views from survey comments, using text analysis. In this paper, we revisit the PSI and quantitatively analyze the determinants of changes in the PSI and the relationship between the PSI and macroeconomic variables. We also address a shortcoming in the text analysis used for computing the PSI that we discover when examining the performance of the PSI since the COVID-19 outbreak. The results of our analyses show that the PSI tends to precede consumer prices by several months and that it reflects various factors affecting price developments, including demand factors associated with the business cycle and cost factors such as changes in raw materials prices and exchange rates. Our analysis suggests that the PSI is a useful monthly indicator of inflation expectations, in that it captures the price-setting stance of firms responding to the Economy Watchers Survey. While the PSI is subject to large short-term fluctuations, it can be used to complement other indicators used for the analysis of price developments such as the output gap, existing indicators of inflation expectations, and anecdotal information from various sources.

Keywords: Inflation Expectations; Machine Learning; Text Analysis; Big Data (search for similar items in EconPapers)
JEL-codes: C53 C55 E31 E37 (search for similar items in EconPapers)
Date: 2021-10-15
New Economics Papers: this item is included in nep-big, nep-cmp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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