MNI INSIGHT: New BOJ Index Pinpoints Commodity Price Effects

The Bank of Japan has developed new tools for measuring costs faced by companies in order to help it identify producer inflation at various stages of the demand cycle, giving policymakers a clearer tool to pinpoint and explain the impact of commodity prices on overall inflation, MNI understands.

A new index series, the Final Demand-Intermediate Demand Index, has been put together by the bank’s Research and Statistics Department and will integrate services and goods prices to look at how rising global commodity prices are impacting inflation at different production stages through the demand cycle, giving a more in-depth look at the now-rebased Corporate Goods Price Index.

The different stages of intermediate demand the new Index will target include crude oil in Stage1, polyethylene in Stage 2, plastic products and advertising service in Stage 3, motor vehicle parts and liquid crystal panel in Stage 4, and then passenger motor cars, gasoline and hotels in the fixed demand index. The breakdown will help explain to consumers how higher raw material costs are absorbed in the corporate chain.

FRONT-LOADED IMPACT

Latest analysis suggests the energy contribution in the ID index, or factory gate inflation, at a ‘stage 1’ level was around 25% y/y but the contribution fell to about 2% at ‘stage 4’. The contribution from the FD index was slightly above 1%.

The department hopes the new tool will foster a better understanding amongst the public that higher commodity prices, rather than a worsening terms of trade, were the biggest downward pressure on Japan’s economy over the last year or so.

The other main take-out for the Bank of that the FD-ID index appears to confirm that inflation pressures slow through into the downstream stages, indicating that “the price shock in upstream stages have been absorbed as the goods moved through the production flow.”

But the view is shared widely that major manufacturers are finding it easier to absorb higher costs than say smaller service firms, something that could be highlighted again in the July Tankan release.

The FD-ID price indexes will be published via the BOJ website for the first time on June 28, with subsequent releases due around the 20th business day of each month.