Upper pressures building up again..
Solid CPI, upper pressures building up. Today’s CPI was on the strong side, although we have learned to take no signal from a single print in this volatile environment. Rather, we continue to suggest to look at the NSA levels and take no signal from the SA data. The relevant news is that the distribution of price changes is less dispersed; there is now significant mass around target and there are signs of renewed upper pressures on prices (see our CI model results below). This should be taken as excellent news for the BoJ, and signals readings consistent with 2%+ (MoM saar) in the coming months. As for the medium-term, our models forecast is a bit stronger (for “core core”) and continues to flag upside risks around the BoJ staff forecast. Finally, we continue to estimate pi* close to target.
Translated: we continue to think that Japan has moved out of deflation. In the current new regime, it seems that core inflation can average around (or above) the BoJ target. For this reason, we continue to expect the BoJ to revise up its forecast in the coming months and normalize rates.
A PDF containing all relevant CPI charts can be downloaded here.
A PDF containing all relevant labor market charts can be downloaded here.
Strong MoM (saar). We estimate that in August the index ex fresh food (BoJ) increased 5.8% MoM saar (Figure 1). As for the other two measures of core inflation, we estimate that the index ex fresh food and energy (core core) increased 5.7% MoM saar. Finally, the index ex food and energy (US-style core) increased 2.8% MoM saar. Today’s prints are on the very strong side. We remind the reader what we have written in recent months: the MoM (sa) prints are likely distorted by seasonal adjustment issues. Therefore, we heavily discount any single print.
Instead, we continue to suggest to look at the NSA levels (see charts package) which suggest that the YoY of core-core (core western-style) can be at 2.5%+ (2.0%+) in December.
Figure 1. Estimated MoM (saar) of core inflation measures.
Note: the figure shows the MoM seasonally adjusted at annual rate of three measures of “core” inflation for the Japanese CPI.
Evidence from the distribution
Distribution centered around target, less dispersed. This month, the distribution is similar to last month (ridge plot here). Extending the horizon (see Figure 2), the interesting news is that the distribution has gained mass around target. This should be taken as excellent news for the BoJ.
Note: we generally do not show the results of our CI (common-idiosyncratic) model for Japan, even if we run it every month. The reader can see the usual decomposition of the MoM print here. The model confirms that upper pressures are building up, as the common component is trending higher. In fact, the contribution of the common component in August is the highest of the last 16 months.
Figure 2. Distribution of CPI items ex food and energy (MoM saar, %).
Figure 2-bis. Contributions of common and idiosyncratic factors to MoM (sa) readings from our CI model.
Our proxies of the BoJ measures of underlying inflation
BoJ underlying inflation measures (YoY) going sideways or ticking up. Figure 3 shows the three measures of “underlying inflation” published by the BoJ (the blue lines). For each measure, we calculated a proxy (the yellow lines) starting from the distribution of price changes. The takeaway is that our proxies remain above the BoJ measures and they are moving sideways or ticking up. The MoM series (here the BoJ mode and our MoM ar proxy) have ticked up recently.
Figure 3. BoJ measures of underlying inflation and our proxies (%).
BoJ trimmed mean and our proxy
BoJ weighted median and our proxy
BoJ mode and our proxy
Note: the figure shows the measures of “underlying inflation” of the BoJ and our proxies. All figures are YoY changes, in percentage points.
Medium-term forecast
The medium-term forecasts continue to point to some upside risks around the BoJ projections. Figure 4 shows our model-based forecast for the three measures of core inflation using the model by BoJ Hogen, Kawamoto and Nakahama (BoJ review, 20215). The updated forecast is a bit stronger than the previous one (see Table 1), as the incoming data triggered an upward revision to our Q3 (sa) forecast, especially for “core-core”. The overall message is intact: the medium-term model-based forecast remains above the last BoJ forecast and at (or above) the 2% target. We suspect that the BoJ staff will be forced, once again, to revise up its forecast.
An Excel file containing all data of Figure 5 can be downloaded here.
Figure 4. Medium-term model-based forecasts.
Index ex fresh food (BoJ)
Index ex fresh food and energy (core-core)
Index ex food and energy (western-style core)
Table 1. Summary of model-based forecasts
Note: The figure shows the model-based forecast of headline CPI and three measures of core CPI. The model is based on Hogen, Kawamoto and Nakahama (BoJ review, 2015). All figures are YoY percent changes. The yellow shadows are intervals of confidence calculated as quasi-out-of sample exercises. The summary table shows the average of the YoY model-based in each fiscal year (Q2, Q3, Q4, and Q1 of the following calendar year).
Trend inflation models and pi*
Pi* close to 2%. Figure 5 shows our new trend models for Japan (based on Rudd (2020). The models suggests that trend inflation is around 1.5%. Considering the level of inflation expectations (Tankan broadly consistent with 2%), and the general equilibrium (wages), we estimate pi* in Japan close to the BoJ target.
Figure 5. Trend inflation models and pi*
Note: the models mimic the ones in Rudd (2020).
“Acquired inflation” and “carryover effect”
Acquired inflation for 2024 suggests upside risks around the BoJ forecast. Figure 6 shows a comparison between our model-based and the BoJ latest forecast. The table also shows the estimated “acquired inflation” and “carry-over” effects. The main takeaway is that the model-based forecast remains above the BoJ forecast in 2024-2026. “Acquired inflation” for FY2024 is 1.4%. The risks around the BoJ staff forecast are to the upside at the end of the medium-term forecast.
Figure 6. Underlying Inflation forecast vs BoJ forecast vs “acquired inflation”
