As Expected.
The July Consumer Price Index (CPI) report was broadly in line with expectations. Incorporating data from the third quarter into the sample for the first time results in only minor revisions to the model-based forecast.
Key Takeaway: Both the distributional analysis and our model estimates indicate that Japan is undergoing a persistent inflationary phase, with inflation rates at or above the Bank of Japan’s (BoJ) 2% target. Acquired inflation for fiscal year 2025 remains well above the BoJ staff forecast, even after the recent upward revision. This suggests that the current staff forecast is, once again, mechanically too low and—based on our assessment—likely to be revised upward in future updates.
In short, our analysis implies that the BoJ is lagging behind the inflation dynamics currently unfolding.
A PDF containing all relevant CPI charts can be downloaded here.
A PDF containing all relevant labor market charts can be downloaded here.
MoM (saar) above the distributions.
We estimate that in July, the BoJ’s core index (excluding fresh food) rose 1.1% MoM SAAR (Figure 1). As for the other two core inflation measures, the index excluding fresh food and energy (core-core) increased 1.1% MoM SAAR, while the index excluding both food and energy (U.S.-style core) rose 1.1% MoM SAAR.
Today’s data are below the signals from the distributions for core-core.
Given the potential distortions introduced by seasonal adjustment, we continue to emphasize the importance of analyzing non-seasonally adjusted (NSA) price levels (see charts package). These NSA indicators suggest that underlying price pressures remain persistent—and, in some cases, even stronger than at this time last year. Specifically, our estimates for core-core inflation now point to a rate exceeding 3%.
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. This month’s distribution is similar to last month (ridge plot here). Looking at a broader horizon (Figure 2), there has been little movement in recent months (if any, the distribution is more dispersed), indicating that MoM readings are likely to stay in line with recent trends in the near-term.
Figure 2. Distribution of CPI items ex food and energy (MoM saar, %).
Our proxies of the BoJ measures of underlying inflation
BoJ Underlying Inflation Measures (YoY) Holding Steady.
Figure 3 illustrates the three “underlying inflation” measures published by the BoJ (blue lines). For each, we’ve calculated a proxy (yellow lines) based on the distribution of price changes.
The key takeaway: Our proxies are close to the BoJ’s measures and going sideways signalling continuing pressures.
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
Medium-Term Forecasts Suggest (Large) Upside Risks around the BoJ Projections. Figure 4 presents our model-based forecast for the three core inflation measures, using the model by BoJ Hogen, Kawamoto and Nakahama (BoJ review, 20215).
This is the first time we have incorporated Q3 data into the sample. While we are still in the process of refining the models and fully digesting the data, today’s CPI release has only minor implications. The figures were broadly in line with the models’ internal forecasts for the current quarter, resulting in only a marginal upward revision to the core-core inflation projection.
Our models remain well above the BoJ’s forecasts for core-core in FY2025 and FY2026.
An Excel file containing the data shown in Figure 4 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* around 2%.
Figure 5 presents our trend inflation models for Japan, based on Rudd (2020). The sample stops in Q3. These models suggest that trend inflation is around 1.8%. The average of the models is unchanged to rounding compared to last run and last quarter.
Taking into account inflation expectations and general equilibrium dynamics (particularly wages), we estimate pi* for Japan to be around the BoJ’s 2% target*.
An Excel file containing the data shown in Figure 5 can be downloaded here.
Figure 5. Trend inflation models and pi*
Note: the models mimic the ones in Rudd (2020).
“Acquired inflation” and “carryover effect”
Risks around BoJ forecast to the upside.
Figure 6 compares our model-based forecast with the BoJ’s latest projections. The table also includes estimates for “acquired inflation” and “carry-over” effects. For FY2025 we estimate that acquired inflation is 2.5% (NSA) for core-core and 2.6% (NSA) for BoJ core. Both are already well above the BoJ staff forecast for the entire year.
The key takeaway: The FY2025 acquired inflation is already above 2% and above the BoJ forecast for both core-core and BoJ core. This suggests that the BoJ staff forecast is mechanically too low. We expect the BoJ staff to revise the forecast higher soon.
Figure 6. Underlying Inflation forecast vs BoJ forecast vs “acquired inflation”
