Inflation expectations are formed through the following two mechanisms: (1) an adaptive formation mechanism, in which the formation is influenced by the course of the past inflation rate, and (2) a forward-looking formation mechanism, in which the formation is based on the idea that the observed inflation rate will, in due course, meet the price stability target set by the central bank.
On this point, the mechanism of formation of inflation expectations in Japan tends to be adaptive, and considerably more so than in other countries (Chart 7). The Bank has attempted to make expectation formation more forward-looking through QQE. In reality, however, before the forward-looking expectation formation fully took hold, the observed inflation rate declined, due mainly to the fall in crude oil prices.