Uneventful.
The March Consumer Price Index (CPI) report was uneventful (to us), as the data aligned with our expectations, consistent with the signals from the distributions (in fact, even higher). The model’s forecast remains largely unchanged, as the incoming information matched the model’s own projection for the current quarter.
Key Takeaway: The distributions and our models suggest that Japan is experiencing a persistent inflationary trend, at or above the Bank of Japan’s (BoJ) 2% target. In other words, our assessment indicates that the BoJ has limited options. In fact, the FY2024 carryover effect for FY2025 indicates that the BoJ staff forecast is too low and (in our estimate) will be revised higher once again.
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) in line with the distributions.
We estimate that in March, the BoJ’s core index (excluding fresh food) rose 3.3% 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 1.8% MoM SAAR.
Today’s data aligns with the signals from the distributions (in fact, they are a bit higher).
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.
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 has a thicker right tail compared to last month (ridge plot here). Looking at a broader horizon (Figure 2), there has been little movement in recent months, 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 below the BoJ’s measures and are moving roughly sideways, but they remain well above pre-Covid levels.
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 (Some) 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 no material implications on the models forecast for core-core and core western-style (see Table 1), as the incoming data are as expected from the models.
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 1.5%+. (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 FY2024 carryover effect for FY2025 is at 1.4% for both core-core and BoJ core. This implies that the FY2025 2.1% forecast for core-core of the Boj staff is mechanically too low and, in our view, will be revised higher in the coming rounds. (the current BoJ staff forecast at this point implies an average MoM of 11bps sa for core-core in FY2025, which appears totally unrealistic)
Figure 6. Underlying Inflation forecast vs BoJ forecast vs “acquired inflation”
