September 25, 2015, 11:30 JST

The August CPI data should not push BoJ into easing

In August, the year on year change in the Japanese CPI excluding fresh food was -0.1%, a first year on year decline since April 2013. The advance September CPI release for Tokyo, a one-month leading indicator for the National CPI, showed that the decline may worsen in the near term. In September, CPI excluding fresh food fell by 0.2% year on year in Tokyo. 

However, we do not think these headline figures will push the BoJ into additional easing in October though. The BoJ governor Kuroda instead will likely point to a few other elements in the CPI data that actually affirm his optimistic view on inflation. 

The first element he will probably point to is that the deflation is still happening only in the energy related area. Energy prices declined by 8.7%, pushing down the overall CPI by as much as 0.8% points. Indeed, CPI index excluding food and energy infact accelerated to 0.8% year on year from 0.6% in the previous month. As Japan is an importer of energy, the decline in energy prices will leave more cash for consumers and Japanese corporates to spend, boosting demand for Japan produced goods and services. 

The second element he may point out is the behavior of seasonally adjusted CPI indices. Despite the decline in energy prices, seasonally adjusted CPI indices are showing a steady rise in recent months, suggesting that the underlying trend in the CPI is still pointing upward. In the past 6 months, the overall CPI has risen by 0.6% after a seasonal adjustment and the CPI excluding food and energy has risen by 0.7%.  

We have some sympathies with governor Kuroda's view on inflation. We completely agree that the decline in energy prices is positive for Japan and on its own poses no threat to the Japanese economy. We also agree that there is yet no sign that the inflation trend is starting to turn downward. The core CPI measure we publish, 10% Trimmed CPI, shows a steady, mildly positive trend inflation. 

Showing that there is a moderate inflationary trend in Japan does not mean there is no need for BoJ to ease though. We would actually argue that the BoJ should be adding more easing if it is to stand by its pledge that the bank will do its utmost to realize a sustained 2% inflation in Japan at an earliest opportunity. While there is a sign of moderate inflation in Japan, its momentum seems quite fragile and it could quickly dissipate with any sizable negative shocks to the economy. In our view, rather than risking for these negative shocks to arise and then try to counter them, the BoJ should take an initiative and try to accelerate the inflation in Japan while it has some momentum left. By maintaining a implausibly optimistic outlook on the economy, the BoJ seems to be falling back to its traditional "gradualism" it said it shed in 2013 when it embarked on the QQE.