New York Fed: "Japanese Inflation Expectations, Revisited "

I strive to avoid becoming an exemplar Churchill's definition of a fanatic: "A fanatic is one who can't change his mind and won't change the subject." but I'm aware I come close with this Japan stuff. Now that Japan is again funding various carry trades (a role that gold had up until late 2012, watch those lease rates baby), in currencies, in government debt even in equities it really doesn't pay to take a parochial view of the cross-border money flows.

For a quick primer on a couple interesting aspects of Japanese policy may I commend to your attention FT Alphaville's "On the virtuous circle of exporting deflation"? I'll leave it to the reader to dive into the meat of the matter, here I'll highlight a bit of back-and-forth in the comment section:

cmmdfacccfa | April 24 2:31pm | Permalink Money doesn't flow out of equities and into bonds, or vice versa. If Joe has cash, and I sell my stock to Joe in order to buy a bond from John, then John becomes the owner of the cash once held by Joe. Someone (Joe) still holds the stock, and someone (cmmdfacccfa) still holds the bond.

The prices of bonds and stocks change depending on our changing assessments of the proper valuations, but cash didn't "flow out of equities." 

To which the response is:

Izabella Kaminska | April 24 3:40pm | Permalink @cmmdfacccfa - you are of course right, but flows create imbalances and thus impact prices. Thus more people wanting to sell equities than sell bonds equals a fall in equities relative to bonds. Thus flows, liquidity and free available float determine everything. 

And there you go.
As a side note, from the syntax I'd guess the first commenter is related to the Ohio Facccfa's.
So how do you measure the intangibles?
From the Federal Reserve Bank of New York:

 An important measure of success for monetary policy is a central bank’s ability to anchor inflation expectations; inflation expectations influence actual inflation and, hence, the achievement of a given inflation goal. This notion has special significance for Japan, where CPI inflation has been intermittently negative since 1994 and where it is widely believed that expectations of future inflation have been persistently negative (that is, ongoing deflation is expected). In this post, we describe and evaluate an alternative, market-based measure of Japanese inflation expectations based on international price parity conditions. We find that recent inflation expectations have attained a level substantially higher than their previous peaks over the past three years.

    By way of background, recent policy action by the Bank of Japan has shone a spotlight on Japanese inflation expectations. On April 4, the Bank announced a program called Quantitative and Qualitative Monetary Easing (QQE), which was a pledge to drastically ramp up asset purchases to increase the monetary base, and to extend the duration of assets held on the Bank’s balance sheet. Since nominal yields on Japanese government bonds have been quite low for some time, a preferred indicator of QQE’s success would be a decline in real interest rates as inflation expectations move closer to the Bank’s recently announced 2 percent price stability target.

Measurement Issues
How does one go about measuring Japanese inflation expectations? The consensus on this topic is that there is no single reliable measure. A commonly used market-based gauge of U.S. inflation expectations is the difference in yield between nominal and Treasury inflation-protected securities (TIPS)—the breakeven inflation rate. Analogous measures come from over-the-counter derivatives called inflation swaps. In Japan, the market for inflation-protected government bonds, called JGBi’s, is very thinly traded and a majority of the issuance has been bought back by the Ministry of Finance in recent years. These factors have cast doubt on the ability of JGBi prices to convey reliable information about inflation expectations. Swaps suffer from similar liquidity issues.

    Alternative extant measures of inflation expectations are available from surveys of households, investors, and professional forecasters. However, survey responses may by formed in a backward-looking manner, making them more responsive to actual inflation than predictive of the future. The range of views offered by market‑ and survey-based measures is illustrated in the chart below. While measures of five- and ten-year expectations have converged somewhere around 1 percent in recent months, in the past analysts would have little confidence of even getting the correct sign of expected inflation by looking at any given measure.



A Measure Based on Purchasing Power Parity
Given these concerns, we consider an additional market-based measure derived from U.S. inflation expectations—for which there are more actively traded inflation‑protected securities and swaps markets—and international price parity conditions. To our knowledge, these tools are not commonly used to make inferences about Japanese inflation expectations, but may provide a useful alternative to Japanese JGBi’s and swaps. One exception is a report by Goldman Sachs Economics Research (“The Market Consequences of Exiting Japan’s Liquidity Trap,” Global Economics Weekly 13/05, February 2013), which uses the thirty-year yen/dollar forward rate to infer Japanese inflation expectations....MORE