• Bloomberg


The Bank of Japan is giving more prominence to an inflation gauge that shows it is much closer to its target than its current key measure.

The central bank for the first time presented a chart of consumer prices excluding fresh food and energy in its monthly report for July. It showed that inflation was at 0.7 percent in May, well above 0.1 percent by its current gauge, which strips out fresh food only.

Highlighting the alternative measure, previously presented in quarterly outlooks, comes as debate is intensifying over how to most accurately measure prices — and its goal grows distant with cheaper oil.

The BOJ’s current gauge understates inflation because it does not account for deteriorating housing quality in rents, according to its chief economist.

The central bank this month promoted a consumer price specialist to deputy head of its monetary policy affairs department, as the government carries out a once-in-five year review of the nation’s price measures.

“There is a chance that the BOJ changes its key inflation gauge in the future and, in retrospect, this could be seen as the first step,” said Naoya Oshikubo, a rates strategist at Barclays PLC. “It seems debate on over the right measure for price trends is heating up at the BOJ.”

The BOJ adopted the 2 percent goal in January 2013 after it struck a pact with Prime Minister Shinzo Abe’s government to end 15 years of deflation. Record stimulus that Gov. Haruhiko Kuroda unleashed months later drove down the yen, boosting export-oriented parts of Japan’s economy while heaping increased costs on households as import prices surged.

Kuroda’s progress has been limited when measured by the BOJ’s current measure, which showed inflation vanishing in February before ticking up. He says the underlying trend is improving, spurred by increased supply constraints, rising wages and expectations for higher costs of living.

Price gains will accelerate “at a rapid pace” later this year, reaching the 2 percent target around the six months through September 2016, he said last week after the BOJ kept its policy unchanged.

Adjusting consumer price data to better reflect housing costs would increase inflation by as much as 0.2 percentage point, Eiji Maeda, the BOJ’s chief economist, said last month. Kiyohiko Nishimura, a former deputy governor, said targeting 2 percent price gains with the current gauge risks sparking an upward spiral in living costs because prices of many products will need to rise at a faster rate than the goal to make up for a drag on the index from distorted housing costs.

While it may take a little time, there is a “good chance” that the BOJ will eventually change its key price gauge, said Robert Feldman, chief economist at Morgan Stanley MUFG Securities Co.

“The Bank of Japan needs to familiarize markets with a new index before making such an important move,” Feldman said in a video note on Tuesday. “Why would moving from a bad index to a good index damage credibility?”

Shigenori Shiratsuka, the official promoted to a deputy head of the BOJ’s monetary affairs department, has written numerous papers on measuring prices and wrote a book called “Economic Analysis of Prices” in 1998.

By presenting the alternative measure in its July monthly report, the central bank appears to be signaling a view that additional easing is not needed now, said Oshikubo at Barclays.

“The BOJ is aware of the potential for the CPI to dip below zero in coming months so they wanted to move preemptively to back up their argument,” said Oshikubo. “Showing the other price data indicates that chances for further easing is receding for this year.”

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.