Japan's new “core” CPI measures debuted

The BoJ posted preliminary "Measures of underlying inflation" charts on its website this week; the final readings will be available for download on December 2. These charts are not new, as they were included in the BoJ's monthly reports and the Outlook reports, but market economists, requested the BoJ to release the data when the Statistics Bureau released the CPI (the monthly reports are only available one day after the policy meeting). 

The BoJ staff recently published the research "Performance of Core Indicators of Japan's Consumer Price Index" and "Core Inflation and the Business Cycle." These pieces explain which "core" inflation measures the BoJ monitors to judge shifts in underlying inflation. To be sure, the BoJ's ultimate goal is to sustain 2% inflation in headline CPI. And, the core CPI, which excludes only fresh food, is still the main "core measure" to judge prices' underlying movement. But, with the large move in energy prices, the Bank claims that it is better to look various measures to judge the underlying trend. 

One might take this release as signaling the BoJ's reluctance to ease as the new "core" measures, such as CPI less fresh food and energy (1.2%oya) and 10% trimmed mean (0.6%) show relatively high inflation. But, this interpretation reads too much into the data, as it is well understood that the recent deflation in traditional "core" CPI, which includes energy, is temporary. 

The BoJ's reaction function is no longer preemptive so the Bank is unlikely to move in the near future. But, it is believed that Kuroda will move if necessary, and the technical discussion on which core measure is most accurate is not so important for their decision. When the BoJ needs to admit that 2% inflation in traditional core CPI will not be achieved by March 2017 (end of FY2016), which is likely to be in 2H16, the BoJ will ease policy without any hesitation.