MNI POLICY: BOJ Mulls Underlying Inflation Rework
MNI (TOKYO) - Bank of Japan officials are considering the release of a revised inhouse calculation of underlying inflation which more accurately reflects households’ experience, particularly of rising food prices, but while the new gauge is likely to be higher than the currently available estimate it will not change BOJ rate hike plans, MNI understands.
The new index will combine a composite index of inflation expectations, and its calculation will incorporate estimates of the Phillips curve over time. The BOJ could release it as early as the May 1 Board meeting, when it publishes its Outlook Report with its first FY2027 forecasts.
Its first reading is likely to be higher than the Bank’s previous estimate of underlying inflation at 1.5%, maintained in the Outlook Report since April 2024, even though the official core inflation metric has held above 2% for some time. (See MNI POLICY: BOJ Unaffected By Weak Underlying Inflation)
But Bank officials will downplay the impact on monetary policy of the publication of the new index, to avoid any market speculation over faster hikes. While the new inflation estimate will be higher, it reflects already-existing factors, and the Bank’s view remains that underlying inflation has not risen and that rapid rate increases remain unnecessary.
STILL BELOW TARGET
The new measure will still show that underlying inflation is below the 2% target. In addition to using its new gauge, the BOJ will also continue to refer to other measures of core trends, as it attempts to form its view of price trends.
The Board hiked the policy rate 25 basis points at the last meeting in January, following July 2024's increase, and the market has not fully priced in an additional hike until October. An increase in the Bank’s view of underlying inflation could however prompt the Bank to boost rates at a six-monthly interval.
The BOJ last rejigged its inhouse underlying inflation view in 2016, switching to a calculation using the core-core consumer price index excluding fresh food and energy. However this has failed to capture the impact on consumer sentiment and spending of the recent jump in food prices, complicating the Bank’s communications, particularly as official measures of underlying inflation produced outside the BOJ are consistently above 2%.
Bank officials want to avoid a repeat of then-Governor Haruhiko Kuroda’s June 2022 comments that households were becoming more accepting of price rises, which drew strong criticism on social media and prompted a public apology.
The BOJ expects the year-on-year increase in inflation to only slow in or after July, piling more pain on households and further complicating its communications challenges.