Data Better than Expected, BoJ Still Late
We have two messages. First, the data in the September CPI report were a bit better than expected. The distributions are sending promising signals, although we need more before switching our minds. Second, in our view, the report is less relevant for the BoJ because the focus at the upcoming meeting will be on the medium-term and the models remain well above the BoJ forecast which we expect to be revised up significantly for FY2023.
A PDF containing all relevant charts can be downloaded here.
MoM (saar) on the weak side. We estimate that in September the index ex fresh food (BoJ) increased at an annual rate of 1.1% (Figure 1). As for the other two measures of core inflation, we estimate that the index ex fresh food and energy (our favorite exclusion index) increased 2.3% MoM saar. This index has been running (on a MoM saar basis) above 2% since February of last year. Finally, the index ex food and energy (US-style core) increased 1.8% MoM saar. Overall, today’s prints are on the weak side and below what the distributions suggested (partially because the distributions seem to be moving to the left).
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 continuing pressure. The metrics for headline CPI as well as for 3 measures of core inflation are shown in Figure 2. The September report has brought the 3m/3m saar of core-core to 3.8%, and western-style core to 2.5% (bottom panels of Figure 2). In both cases, prices at the margin are running in line with the YoY, suggesting that the latter should go sideways in 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 still unfriendly, although less. In September, the distribution (of CPI items ex food and energy), moved to the left with all percentiles ticking down (Figure 3). The distribution remains different than pre-Covid with a much thicker right tail but the difference is smaller now than in recent months.
(Note: the distributions over 3 months (see here) show signs of improvements. We are very careful at the moment because this result might be influenced by the seasonal adjustment method. Nevertheless, at this point it is worth stressing that based on this evidence we have revised down our near-term forecast)
Figure 3. Ridge plot of cross-section distribution of MoM (%, ar) of CPI items ex food and energy
Note: the Figure shows the cross-section distribution of MoM (%, saar) of CPI items ex food and energy. The dashed black line indicates the median. The colors show the percentiles (<10pct, 10pct-25pct, 25-75pct, 75-90pct, and >90pct). The levels of the series (about 300 in total) are seasonally-adjusted in-house using X-13 (SEATS) option.
Our proxies of the BoJ measures of underlying inflation
BoJ underlying inflation measures can go sideways before ticking up again. Figure 4 shows the three measures of “underlying inflation” published by the BoJ (the blue lines). For each measure, we have calculated a proxy (the yellow lines) starting from the distribution of price changes. The takeaway from Figure 4 is that our proxies are going sideways but remain well above the BoJ measures. Not only, but the MoM (ar) series of our proxies (here the BoJ trimmed mean and our MoM ar proxy) are rebounding, signaling that some upside pressures are still building up.
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 forecast points to upside risks. 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). We do not enter into the details because we have recently circulated a note (here) with model-based simulations. The bottom line is that the models forecast (“current” in the table) is little changed compared to the previous run because the incoming data did not alter our Q3 nowcast. The medium-term model-based forecast remains well above the last BoJ forecast at every horizon.
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).
The “acquired inflation” issue of the BoJ
The BoJ forecast is mechanically too low. Figure 6 shows a comparison between our (model-based) forecast for the index excluding fresh food and energy vs the BoJ latest forecast and the estimated “acquired inflation” and “carry-over” effects. The main takeaway is that “acquired inflation” for FY2023 is already well above the BoJ forecast. In other words, in order to meet the BoJ forecast from now on, the level of the series should stop growing (in fact it should decrease). While this is Japan and everything can happen, given the distribution of price changes, we think it is unlikely (the reader can see a comparison of our MoM forecast and the one consistent with the BoJ forecast in Figure 7). Translated: in our estimates, it is likely that the BoJ will revise up its forecast at the coming meeting, especially for core-core in FY 2023 (and 2024).
Figure 6. Underlying Inflation forecast vs BoJ forecast vs “acquired inflation”
Figure 7. Underlying inflation (MoM, sa) of index excluding fresh food and energy and implicit BoJ forecast.
Note: the figure shows our MoM (sa) forecast of the index excluding fresh food and energy (the blue line). The red line is the average MoM consistent with the latest BoJ forecast.
Implications for the BoJ
BoJ waking up? Last month we wrote “The BoJ can hold for a while.. but it should realize pretty soon that its forecast is, once again, too low”. Nothing has changed despite the downward surprise in today’s data. A revision of the YCC is also possible at this point.