Core CPI came in strong, reversing previous signals. In the last two months, we have been very careful taking signals from the SA MoM readings, arguing that they were distorted by seasonal adjustment issues. Indeed, today is a confirmation. In this environment, we continue to suggest to look at the NSA levels and take no signal from the SA data. The overall picture is intact: the YoY of core-core (core western-style) can be at 2.5%+ (2.0%) in December. As for the medium-term, our models forecast is little changed and continue to flag upside risks around the BoJ staff forecast. Finally, we estimate pi* close to target (please, note that we have introduced trend models for Japan – see Figure 6).
We remain convinced that normalizing rates in Japan is necessary.
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 June the index ex fresh food (BoJ) increased 5.7% 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 3.4% 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 and well above the signal of the distributions. As we flagged in recent months, we are very careful in taking signal from SA data, as most of them are distorted from seasonal adjustment issues. We continue to suggest to look at the NSA levels (see slides 15 and 16 here) 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.
The metrics suggest some cooling. The metrics for headline CPI as well as for 3 measures of core inflation are shown in Figure 2. Today’s report has brought the 3m/3m saar of core-core to 1.2%, and western-style core to 1.3% (bottom panels of Figure 2). In both cases, prices at the margin are running lower than the YoY, suggesting that the latter has room to tick down in the coming months before ticking up again.
Figure 2. Metrics of Japanese CPI indexes.
Headline CPI
Index ex fresh food (BoJ)
Index ex fresh food and energy (core-core)
Index ex food and energy (western-style core)
Evidence from the distribution
Distribution centered around target, no sign of movements. This month, the distribution has a thicker right tail than last month (ridge plot here). Extending the horizon (see Figure 3), the distribution of core western-style shows no significant movements in the last 9 months or so. The distribution continues to be centered around target, and suggests similar readings in the near-term.
Figure 3. Distribution of CPI items ex food and energy (MoM saar, %).
Our proxies of the BoJ measures of underlying inflation
BoJ underlying inflation measures (YoY) can tick down. Figure 4 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 from Figure 4 is that our proxies remain above the BoJ measures but they are moving down or sideways. The MoM series (here the BoJ mode and our MoM ar proxy) have moved down but remain above pre Covid levels.
Figure 4. 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 5 shows our model-based forecast for the three measures of core inflation using the model by BoJ Hogen, Kawamoto and Nakahama (BoJ review, 20215). Today the model took some signal from the data and revised up marginally the forecast (see Table 1). The current forecast is very similar to the one of 3 months ago. The overall message is intact: the medium-term model-based forecast remains above the last BoJ forecast and at (or above) the 2% target.
An Excel file containing all data of Figure 5 can be downloaded here.
Figure 5. 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 6 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 6. Trend inflation models and pi*
Note: the models mimic the ones in Rudd (2020).
“Acquired inflation” and “carryover effect”
Acquired inflation for 2024 suggests some upside risks around the BoJ forecast. Figure 6 shows a comparison between our (model-based) forecast for BoJ core and core-core vs the BoJ latest forecast and the estimated “acquired inflation” and “carry-over” effects. The main takeaway is that the model-based forecast remains above the BoJ forecast in 2024 and 2025. “Acquired inflation” for FY2024 is 1.1%-1.2%, which means that the BoJ forecast for FY2024 is probably a bit too low. The risks around the BoJ staff forecast are to the upside, including at the end of the medium-term forecast. In our estimates, the BoJ staff can revise up (marginally) again its forecast for core-core.
Figure 6. Underlying Inflation forecast vs BoJ forecast vs “acquired inflation”
