MNI POLICY: BOJ To Mull Phasing Out Underlying CPI

The Bank of Japan is likely to gradually phase out its emphasis on its in-house underlying CPI calculation as the main policy reaction function, shifting toward CPI to improve clarity and reduce market confusion, while also taking a more flexible approach to real wage growth, MNI understands.

Officials believe the concept is too difficult to define clearly and often is misunderstood but will proceed cautiously to avoid triggering speculation over early rate hikes. While they are watching market reaction closely, they stress the BOJ will continue to emphasise that high CPI readings do not automatically justify rate increases, as current inflation remains driven by temporary cost-push factors, including the shift of high labour and distribution costs. (See MNI POLICY: BOJ Sees No Need To Rush Rate Hikes)

The Bank has long defended its use of underlying CPI – which remains below 2% – to justify a gradual approach to policy normalisation but acknowledges the measure has diverged from costs experienced in everyday life, with core CPI above 2% for 41 straight months.

The BOJ has faced repeated calls to define “underlying inflation,” but officials say this is technically impossible. The Bank considered a rework of their internal calculation earlier in the year to reflect more accurately households’ experience, particularly of rising food prices. (See MNI POLICY: BOJ Mulls Underlying Inflation Rework)

The BOJ has prevously cited core CPI excluding fresh food as its measure of underlying price trends, but in September 2016 it shifted to core-core CPI, which also excludes energy. The bank has also developed statistical measures such as the trimmed mean, weighted median, and mode to better gauge underlying price trends.

REAL WAGE VIEW

The BOJ also used to describe price movements as driven by cost-push and wage-price dynamics but has dropped this phrasing, noting that mixed factors make the distinction difficult to maintain. Earlier, it focused on a “wage-price virtuous cycle,” implying wage growth exceeding price rises and positive real wages. The bank has since replaced this with “the mechanism in which wages and prices rise moderately in interaction,” stressing that it cannot commit to achieving positive real wages.

Officials note that achieving sustained positive real wages would take a long time and could constrain monetary policy flexibility. The revised language is intended to preserve this flexibility, while focusing on moderate rises in wages and prices without committing to positive real-wage growth.