The BoJ Pause
Core CPI came in on the weak side for the 3 consecutive month; we remain cautious. In general, at this point we would take some signal. However, in this case we are still skeptical for the following reasons: (i) the NSA level of the series remains compatible with the YoY of core-core (and core western-style) around target at the end of the year (which suggests part of the MoM sa weakness can be due to seasonal adjustment issues), (ii) the distribution of price changes shows no movements in the last 9 months or so, (iii) the medium-term forecast remains above the BoJ forecast and above target. Not only, but mechanically the BoJ staff has little room to revise down the forecast (if anything, we expect the staff to revise it up marginally, given the carryover for FY2024).
Putting everything together, the impression is that pi* in Japan is close to 2%: expectations are consistent with target, and nominal wage growth is gently picking up. The issue is that trend inflation has lost a bit of momentum and it is probably below target. For this reason, we expect the BoJ to take time. We remain convinced that normalizing rates in Japan will be necessary down the road.
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) on the weak side, NSA level not so much. We estimate that in May 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 1.1% MoM saar. Finally, the index ex food and energy (US-style core) increased 0.8% MoM saar. Today’s prints are on the weak side and below the signal of the distributions. Having said that, the NSA level of the series (see here and page 16 and 17 of the PPT) continues to suggest that the YoY of both core-core and core Western-style could be at 2% (or above it) at the end of the year. Put it differently, the NSA level suggests that some of the weakness in Figure 1 can be due to seasonal adjustment issues.
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 1.1% (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.
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 is less dispersed (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 moderate sequential 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. The MoM series (here the BoJ mode and our MoM ar proxy) are also moving down now and they have basically normalized. For this reason, we expect the BoJ measures to tick down in the coming months. This should push the BoJ to remain on hold.
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 down marginally the forecast of core-core and core western-style. (see Table 1). Nevertheless, 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).
“Acquired inflation” and “carryover effect”
Carryover 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. Conditional on our forecast, the carryover for FY2024 is around 1%, 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”
