Pressure continues.
The June Consumer Price Index (CPI) report was -on net- in line with expectations. The model’s forecast is largely unrevised, as the data confirmed our nowcast for the current quarter.
Key Takeaway: The distributions and our models suggest that Japan is experiencing a persistent inflationary trend, around or above the Bank of Japan’s (BoJ) 2% target. Acquired inflation for FY2025 is now above the BoJ staff forecast; this implies that the BoJ staff forecast is mechanically too low and (in our view) will be revised up again. In other words, our assessment indicates that the BoJ is late.
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 June, the BoJ’s core index (excluding fresh food) rose 0.0% MoM SAAR (Figure 1). As for the other two core inflation measures, the index excluding fresh food and energy (core-core) increased 4.5% MoM SAAR, while the index excluding both food and energy (U.S.-style core) rose 2.0% MoM SAAR.
Today’s data are above the signals from the distributions for core-core.
Given potential seasonal adjustment distortions, we continue to emphasize looking at NSA levels (see charts package), which suggest that price pressures remain persistent and even higher than last year (for core-core we are now pointing to 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 some are ticking higher 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).
Today’s CPI release had only minor implications on the models forecast for core-core and core western-style (see Table 1), as the incoming data confirmed our Q2 nowcast.
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). These models suggest that trend inflation is around 1.8%, unchanged compared to the previous run. (These results are in line with our CI model, not shown but available upon request)
Taking into account inflation expectations (with the Tankan survey broadly aligning with 2%) 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.
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”
