MNI INSIGHT: BOJ To Explain Lower Phone Cost Impact On CPI

The Bank of Japan aims to clearly communicate that a drop in consumer prices to near zero because of lower mobile phone costs is temporary and does not reflect the underlying firm forecast trend, MNI understands.

Policy communication will first come in the full-text Outlook Report due out on Oct. 29 on the heels of the policy-setting meeting on Oct. 27-28. The BOJ will likely explain the lower costs are more akin to a one-time shock as was seen in 2017.

But confidence in the underlying price trend will remain solid through the 10% trimmed CPI, the diffusion index, that shows the share of price increases and decreases, and output gap.

Figures are the weighted averages of the year-on-year price changes in individual items making up the CPI. Items are arranged in ascending order of their year-on-year rate of price change and those falling into the upper and lower 10% tails by weight are trimmed.

The U.S. Federal Reserve has recently adapted the same figures to explain price moves.

INFLATION EXPECTATIONS

Inflation expectations however are not expected to drop despite a near-zero headline inflation number even though the BOJ is aware that headline CPI is built into corporate decisions on salaries and the government's pension fund payments, see: MNI INSIGHT: BOJ Eyes Company Pricing Plans As Lockdowns Ease.

A complex mix of factors goes into actual price increases or decreases along with economic trends in terms of the adaptive inflation component in Japan. But BOJ officials are also paying attention to the second-round effect of the drop in mobile phone costs and consumer inflation expectations, including, in theory, that household real purchasing power could increase as a result.

Japan's July annual core consumer inflation rate fell 0.2% y/y, for the 12th straight drop, and has stayed below 1% since November 2018, which is well below the BOJ's 2% price target.