2% or More!
Strong. Today’s CPI was strong, and a bit stronger that the signal of the distributions. Overall, the message remains the very same since the beginning of the year: the distributions and the models suggest that Japan is facing a persistent process, centered around or a bit above the BoJ target (pi* at 2%).
Ueda sounded dovish yesterday but he is likely underestimating pi*. Not only, but acquired inflation for FY2024 for core-core is above 2% and above the BoJ staff forecast, which is therefore mechanically too low and (in our estimate) will be revised up in January.
In a nutshell: the BoJ did not hike in December but in January the staff will submit updated projections and, in our view, will force Ueda to hike.
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 November the index ex fresh food (BoJ) increased 6.8% 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 3.4% MoM saar. Finally, the index ex food and energy (US-style core) increased 1.9% MoM saar. Today’s prints are stronger that the signals of the distributions.
Given possible seasonal adjustment distortions, we continue to suggest to look primarily at the NSA levels (see charts package) which suggest continuing price pressures.
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, the distribution is similar to last month (ridge plot here). Extending the horizon (see Figure 2), the distribution has not moved much in recent months. This suggests MoM readings similar to the recent ones 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) going sideways. Figure 3 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 is that our proxies remain above the BoJ measures and they are moving sideways on average.
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
The medium-term forecasts continue to point to some upside risks around the BoJ projections. Figure 4 shows our model-based forecast for the three measures of core inflation using the model by BoJ Hogen, Kawamoto and Nakahama (BoJ review, 20215). The updated forecast is very similar to the previous one (see Table 1), as the incoming data have not changed much the quarterly nowcast. The overall message is intact: the medium-term model-based forecast remains above the last BoJ forecast and at (or above) the 2% target. We suspect that the BoJ staff will be forced, once again, to revise up its forecast.
An Excel file containing all data of Figure 5 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 shows our 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 around the BoJ target.
Figure 5. Trend inflation models and pi*
Note: the models mimic the ones in Rudd (2020).
“Acquired inflation” and “carryover effect”
Acquired inflation for 2024 suggests upside risks around the BoJ forecast. Figure 6 shows a comparison between our model-based and the BoJ latest forecast. The table also shows the estimated “acquired inflation” and “carry-over” effects. The main takeaway is that the model-based forecast remains above the BoJ forecast in 2024-2026 for core-core. “Acquired inflation” for FY2024 is 2.1-2.2% for core-core, which means that the 2024 BoJ forecast is mechanically low and will be revised up. The risks around the BoJ staff forecast are to the upside at the end of the medium-term forecast.
Figure 6. Underlying Inflation forecast vs BoJ forecast vs “acquired inflation”
