Consumer Confidence Indices have become more prominent over the past few decades and have long been used by the media and financial markets as a means of predicting household consumption. Research conducted by academic economists in the United States, the United Kingdom and Sweden indicates that consumer sentiment does in fact have significant explanatory power with respect to current and future consumption. However, this has led to much controversy as these empirical findings contradict the standard macroeconomic theory of consumption, the Rational Expectations Permanent Income Hypothesis (REPIH). This hypothesis states that consumers are forward looking and use all currently available information, including consumer confidence indices, to form estimates of permanent income. This implies that while consumer confidence may be correlated with current consumption, it should have no predictive capacity for future consumption•. To justify these findings authors have proposed explanations relating to the existence of liquidity constraints, uncertainty and habit formation. Adding to the controversy is the fact that studies in the context of Hong Kong and Australia have shown empirical findings that are actually consistent with the REPIH.
This research considers these issues in the context of Japan. The findings suggest that consumer confidence in Japan shows no predictive abilities over and above a control variable. As such, while other macroeconomic variables may refute the REPIH hypothesis in the context of Japan, consumer confidence on its own does not. In conclusion, it is noted that the diversity of empirical findings is perhaps to be expected in that factors such as uncertainty and liquidity constraints are likely to vary across countries and over time.