MNI POLICY: BOJ To Phase Out Underlying CPI Gradually

The Bank of Japan has begun a gradual phase out its in-house underlying inflation gauge as the primary guide for policy decisions and will instead rely on headline and core CPI to steer monetary policy, in a move aimed at improving communication with markets, MNI understands.

Senior BOJ officials now believe that temporary factors will no longer distort consumer prices, allowing the internal underlying inflation calculation and real CPI to converge near the Bank’s 2% target. 

Officials envision a shift toward managing policy in line with real CPI, similar to other central banks, which they believe will strengthen policy transparency.

The exact timeline of the shift could not be determined. MNI reported in September that the BOJ was contemplating the move to reduce market confusion. (See MNI POLICY: BOJ To Mull Phasing Out Underlying CPI)

CONVERGING INFLATION

The shift was reflected in the Bank’s October Outlook Report, which stated that “underlying CPI inflation ‘and’ the rate of increase in the CPI (all items less fresh food) will increase gradually.” The report also warned that food price increases could persist longer than expected “if new temporary factors arise or if the pass-through of increased personnel expenses and distribution costs to selling prices strengthens.” 

However, officials are not currently focused on any specific temporary factors, despite uncertainty around crude-oil prices and geopolitical risks.

The BOJ expects the year-on-year rise in core CPI to fall below 2% through the first half of fiscal 2026 as the impact of higher food prices, including rice, fades. The Bank had previously attributed elevated core CPI mainly to temporary supply-side factors, but some of these influences are proving more persistent, complicating market communication.

Japan’s core consumer inflation accelerated to 2.9% in September from 2.7% in August on higher energy prices, even as food prices excluding perishables declined, remaining above the BOJ’s 2% target for the 42nd straight month.