Business

BOJ's CPI overhaul suggests bond-buying slowdown, analysts say

by Kevin Buckland and Shigeki Nozawa

Bloomberg

The Bank of Japan’s drive to change the way inflation is measured suggests a tapering of bond-buying stimulus will come sooner than markets think.

The central bank is lobbying for a revision to housing cost estimates that could boost its preferred price gauge to within half a percentage point of its 2 percent goal, according to UBS AG. The government is conducting a once-in-five-year re-basing of consumer price indexes, due to take effect July 2016, the middle of BOJ Gov. Haruhiko Kuroda’s six-month target period for reaching the CPI goal.

A measure of rents in the world’s third-largest economy fell 0.3 percent in May from a year earlier, depressing core CPI to near zero.

BOJ Chief Economist Eiji Maeda contends that current estimates of rental values are flawed because they ignore the depreciating value of a property over time.

“If the BOJ adopts a new measure of CPI, it means the chances of reaching the target will be much more possible,” said Naoya Oshikubo, a rates strategist at Barclays PLC in Tokyo. “That means the timing of tapering will be much closer,” pushing up JGB yields, he said.

Barclays forecasts the 10-year yield will rise to 0.75 percent by mid-2016, even without a redefinition of CPI. A weighted-average forecast of analysts surveyed by Bloomberg predicts 0.58 percent. The benchmark bond yielded 0.405 percent on Monday in Tokyo.

Rental values make up almost one-sixth of the broadest measure of CPI, which is why UBS sees the BOJ’s proposed tweak adding as much as 0.3 percentage points to inflation. A rebound in oil after tumbling to as low as $42 a barrel could provide the rest.

“If the oil price rebounds to $70, we may see CPI reaching 2 percent,” said Yusuke Ikawa, a Tokyo-based strategist at the Swiss lender. “Reviewing the way imputed rents are calculated is a constructive step.”

Even if the central bank fails to win the government over on how to calculate home values, it has already been sending signals that it’s looking beyond its preferred measure of price changes that strips out food prices and the effects of an April 2014 sales tax increase. The BOJ gave more prominence to a gauge that also excludes energy costs in its monthly report for July, a statistic it had previously reserved for quarterly outlooks.

In another sign of change, the BOJ this month promoted a consumer price specialist, Shigenori Shiratsuka, to deputy head of its monetary policy affairs department. Barclays says the appointment could presage the BOJ building its own price index, and that might also bring forward the timing of an exit from stimulus.

Kuroda expressed confidence this month that price gains will accelerate “at a rapid pace” later this year. The BOJ has refrained from expanding its bond-buying program since October, and more than a third of economists surveyed by Bloomberg now predict no additional easing.

Okasan Securities Group Inc. predicts the 10-year yield could climb to 1 percent if the BOJ reaches its inflation target, but an increase beyond that would require a stronger economic recovery.

“Even if the BOJ achieves 2 percent inflation, the question is whether there’s a good balance in the economy if growth is weak,” said Makoto Suzuki, a senior bond strategist at the brokerage in Tokyo. “People are already starting to feel that prices are rising a lot more than the statistics show.”