Divyang Shah, Senior IFR Strategist
Such a switch has major implications in achieving the BoJ’s 2% inflation target and could mean that the central bank may have to get more aggressive on policy, potentially undermining the JPY further.
There are certainly advantages to using the core-core measure of inflation as it allows looking past the impact of a weaker JPY on energy prices. With the BoJ expected to continue with its QE at a time when other major central banks are indicating a protracted pause (forward guidance) or reduction in monetary stimulus (Fed tapering), JPY should remain biased toward weakness. Japan is a net energy importer, so the JPY-weakness helps to bias core CPI higher and does not provide an accurate read on what prices in general are doing.
Before being appointed BoJ governor back in March, Kuroda indicated that there was no need to set a target for consumer prices excluding both food and energy.
Given the politicisation of the BoJ, it seems likely that the central bank will shift its position closer to the thinking of PM Abe. Reuters quotes an official involved in the possible core-core switch as saying “unless we have price rises that aren’t temporary, that won’t reverse, we can’t say we’ve escaped from deflation.”
An eventual switch by the BoJ toward using the core-core would have important implications for monetary policy and the JPY.
It would mean that BoJ policy could become more expansive and stay looser for longer as JPY-weakness and its impact on energy prices has been an important factor in moving core-CPI higher.
The core measure of CPI was flat in May while the core-core measure was at -0.4%, highlighting that there will indeed be increased pressure for the BoJ to deliver on the 2% target with more stimulus and not rely on the impact of JPY-weakness on inflation alone.
