REPEAT: MNI INTVW: Japan CPI Rent Reform May Not Push Up Index

--No Major Downside Risks Seen When CPI Base Year Switches in 2021

By Max Sato

     TOKYO (MNI) - Japan's efforts to improve consumer price index data,

including a long-debated change to the method of estimating housing rental

costs, may not lead to an upward revision to the CPI as some policymakers wish

to see, a senior government statistician told MNI.

     Government surveys in 2013 showed rents for apartments in Setagaya, a

popular ward in Tokyo, fell across the age scale of rental buildings in a

five-year period from 2008, indicating the gap between the two survey years

contained both effects of aged-deterioration and softer market conditions.

     --SOFT RENTAL PROPERTY MARKETS

     "I think the supply and demand balance (of rental places) is one of the

biggest reasons for falling rents." Tomohiko Sato, director of the prices

statistics office at the Ministry of Internal Affairs and Communications, told

MNI in a recent interview.

     It is technicality difficult to accurately measure how much of the drop is

due to the deterioration of the surveyed properties and how much is from a

downward shift in the rental market amid the shrinking working population, he

said.

     "You might think when data quality adjustment is applied (to surveyed

rental units), it would push up rents, but it could also push down rents," Sato

said.

     This is because rental properties vary from one to another. Some are

renovated and their quality is considered to be higher than before. If the rents

for those properties remain the same, the renters are actually paying less as

they are receiving improved quality.

     It is the same logic behind estimating the prices of personal computers,

with their quality in mind. When an updated model with improved functions is

priced the same as its earlier version, its CPI price will drop.

     --QUALITY ADJUSTED DATA AS REFERENCE

     The government plans to begin releasing "reference figures" for

private-sector rents and imputed rents after quality adjustments in August 2021,

when it switches the CPI base year to 2020 from 2015 and updates the weighting

of surveyed goods and services. The major revision to CPI is conducted every

five years to correct for statistical upward drift and reflect the latest

consumer spending patterns.

     In Japanese CPI data, rents and imputed rents have been posting

year-on-year declines while other items, such as the prices for energy and

processed food have been rising in recent months. Some policymakers and

economists blame the lack of "quality adjustments" for what they see as a

downward bias in estimating rents and imputed rents.

     Imputed rental costs are not based on actual commercial transactions but an

estimate of the rents house owners would be willing to pay to live in their own

homes.

     In a desperate effort to guide low inflation higher, towards the 2% target,

Bank of Japan officials have been campaigning for applying quality adjustments

to the aging of rental apartments when estimating imputed rents.

     --PROS AND CONS ON RENTAL ESTIMATES

     However, government statisticians have been saying there is no established

method to distinguish between price changes due to aged-deterioration of

existing homes (if the rent is the same, the cost for the tenant is higher) or

from price changes caused by emergence of new housing (if the rent is the same,

the cost is lower).

     In 2015, Eiji Maeda, then director-general of the BOJ's Research and

Statistics Department, told the government's Statistics Commission that what he

saw as a downward bias by about 0.2 percentage point in imputed rents should be

corrected to reflect generally deteriorating housing conditions in an aging

society.

     The latest data showed that Japan's average core consumer price index

(excluding fresh food) was flat on the month in December, leaving the

year-on-year increase at 0.9%, unchanged from November.

     Goods prices excluding volatile fresh food prices rose at a much higher

pace of 1.8% on year in December while the prices for services ranging from

rents and restaurants to medicine and communications rose just 0.1%.

     Among the weak service prices, imputed rents, which account for about 15%

of the CPI basket, fell 0.2% on year in December, showing continued drops.

     The BOJ's estimate is based on the method used in the U.S. to estimate

imputed rents: monitoring the same rental units over years.

     In Japan, the Ministry of Internal Affairs and Communications cover a wider

range of units, including those that used to exist in previous surveys and those

that have been added to the real estate market recently.

     Government officials point out that some members of the Statistics

Commission are "skeptical" about the need to apply quality adjustments to what

is deemed to be deterioration of rented apartments because renters may not feel

the quality is declining so much.

     --ADDING MORE ON-LINE DEALS, FUNERALS

     The ministry's CPI statistics team is trying to improve the accuracy of

imputed rent estimation by switching the survey targets to real estate agencies

and property owners from renters. That is because the former group tends to have

more information, such as renovation records and detailed layouts of apartment

units.

     In other areas of CPI statistical improvements to be included in the 2021

revision, the ministry plans to expand the coverage of consumption on the

Internet to hotel charges, clothing, small appliances, food gifts and bulky

goods like water. It already reflects on-line air fares, banking fees and some

health food prices.

     Consumer prices offered on the Internet tend to rise and fall sharply but

by expanding the coverage areas of the CPI statistics, the government should be

able to show the latest price trend more clearly, Sato said.

     The government also plans to include prices for funerals in the CPI data,

as the mortality rate is rising along with the aging population, he added.

     --SMALLER CPI UPWARD BIAS

     "At this point, there are no major factors to push down the CPI sharply

when the base year is switched in 2021 but we must wait until we update the

weighting of the items in the basket as some prices are falling and others are

rising," Sato said.

     In order to correct an upward bias that the Laspeyres index tends to show

as time passes from the base year, in 2007 the government began releasing more

often -- monthly, instead of annually -- chain-weighted CPI data (using shifting

weights based on recent consumption patterns) in addition to the official fixed

CPI figures.

     The upward bias appears to have shrunk in recent years.

     In calendar 2017, the core CPI (excluding fresh food) rose 0.5% from the

previous year, in both the chained and fixed measures.

     The last update to the CPI formula, in 2016, resulted in only slight

revisions (some are upward, others downward) or no changes from the figures

based on the previous base year and weighting.

     Previously, the revision led to a 0.6 of a percentage point downgrade of

the core CPI in the re-weighting in 2011, and negatively affected CPI by 0.4

point, 0.2 point and 0.1 point in the previous 5-year updates.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com