Inflation Hawks Given More Ammo by New BOJ Measurements

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Source: https://www.boj.or.jp/en/research/research_data/cpi/cpirev.xlsx and https://www.e-stat.go.jp/en/stat-search/file-download?statInfId=000032103932&fileKind=1 Note: see text for explanation; 68% means these items include 68% of the household budgetKey Points:· The Bank of Japan (BOJ) has given its inflation hawks more ammunition for rate hikes by adjusting some measures· It now publishes a second set of measures that correct artificial distortions, e.g., government subsidies that push down energy prices· As a result, healthy demand-led core inflation is closer to the BOJ’s 2% goal, thereby justifying more interest rate hikes· More problematic are new estimates of the demand-supply gap in GDP, also called the “output gap”· Previously, the BOJ believed that real GDP was a bit below the economy’s full capacity; revised measures say it’s a bit over full capacity· If the BOJ is right, that would mean that inflationary pressures are stronger than previously thought, thereby justifying faster hikes toward normal rates· Nonetheless, due to the Iran war, and other factors, I believe the BOJ will move cautiouslyThe memo below is available only to paid subscribers. Free subscribers can get instant access to the full text of this and all future Memos by subscribing for $50 per year. If you only want this Memo, you can subscribe for a month for $5, get the Memo, and then cancel. You will also receive any other memos I put out over the coming 30 days. Journalists desiring to cite this piece can write to me at rbkatz@rbkatz.com to obtain the full text. Free subscribers will continue …