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Press Release

Communication and Price Stability: Lessons Learned from Japan (Cleveland Fed Researcher)

Steps taken by central banks to increase the transparency of their monetary policies through clearer communications with the public not only increase their accountability, but can also enhance the effectiveness of their monetary policies. However, central banks can face a struggle in communicating an inflation objective in a deflationary environment, particularly when policy rates are near zero and deflation is a persistent problem, as has been the case in Japan.

According to Federal Reserve Bank of Cleveland researcher Owen Humpage, when interest rates approach zero, standard monetary-policy operations are not likely to affect short-term rates and to spur much lending and economic activity. If, in addition, prices are falling, households and businesses will postpone borrowing and spending, reasoning goods will be cheaper in the future.

But monetary policy can still work in such deflationary situations, says Humpage, by creating expectations that the central bank will keep monetary policy easy—that is, keep short-term interest rates very low—as long as it takes to generate price increases (inflation). Humpage says economists and policymakers can learn much about this monetary-policy expectations channel from Japan's efforts to communicate a credible inflation objective when prices are falling.

For example, in 2006 the Bank of Japan attempted to clarify its empirical definition of price stability, and communicated a range of 0–2 percent. However, when deflation is a recent and recurring problem, a very low inflation objective can be self defeating, says Humpage, as the public may continue to anticipate that deflation is the most likely outcome.

In such a case, says Humpage, a central bank might want an unusually high inflation objective, implying a much easier policy. In such an environment, households and businesses are more likely to anticipate future inflation, and they are prone to spend today.

Read more in Communication, Credibility, and Price Stability: Lessons Learned from Japan

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479