Inflation and Central Bank Independence: Is Japan Really an Outlier?

The Bank of Japan has often been viewed as an outlier in combining low inflation with little formal central bank independence. This view has been based mainly on simple correlations between average inflation and measures of central bank independence. When additional factors that might account for cross-country variation in inflation rates are incorporated into the empirical analysis, Japan no longer appears to be a significant outlier. Since reputational considerations may have played a role in supporting a low-inflation environment in Japan, a simple model is used to show how increased political competition might affect equilibrium inflation.