Inflation Metrics
CPI, core CPI, PPI, and inflation expectations in Japan
Inflation Metrics
Inflation measurement is critical for JGB markets because:
- BOJ’s mandate: 2% inflation target is the primary policy objective
- Real yields: Inflation determines whether nominal JGB yields offer positive real returns
- Policy expectations: Sustained inflation above 2% triggers tightening → Yields rise
- Indexation: Some JGBs (JGBi) are inflation-linked (see Chapter 2.9)
Japan’s inflation metrics differ significantly from those in the US and Europe, particularly in how “core” inflation is defined. Understanding these nuances is essential for interpreting BOJ policy signals.
Consumer Price Index (CPI): The Primary Inflation Gauge
Release Schedule
Published by: Ministry of Internal Affairs and Communications (Statistics Bureau)
Frequency: Monthly, released ~3 weeks after month-end (around the 20th)
Example timeline:
- September CPI data → Released October 20
- October CPI data → Released November 22
Market impact: ⭐⭐⭐⭐⭐ (10Y JGB yields can move 5-10bp on surprise)
CPI Basket Composition
The CPI measures price changes for a representative basket of ~600 goods and services weighted by household consumption patterns:
| Category | Weight (2020 base) | Volatility |
|---|---|---|
| Food | 26.6% | High (weather, supply shocks) |
| Housing | 20.7% | Low (rent-controlled) |
| Transportation & Communication | 14.8% | High (energy prices) |
| Culture & Recreation | 9.9% | Medium |
| Medical Care | 4.3% | Low (national health insurance) |
| Education | 3.2% | Low (public subsidies) |
| Other | 20.5% | Medium |
Key insight: Food and energy together represent ~40% of the basket, making Japanese CPI highly sensitive to commodity price shocks.
The Three Flavors of CPI: Headline, Core, and Core-Core
This is where Japan differs crucially from the US and Europe.
1. Headline CPI (All Items)
What it includes: Everything in the basket (no exclusions)
BOJ usage: Monitored but not the primary target
Why it’s volatile:
- Fresh food prices swing ±10% seasonally (typhoons, droughts)
- Energy prices fluctuate with global oil markets
- One-time policy changes (consumption tax hikes)
Example (October 2024):
- Headline CPI: +2.9% YoY
- Driven by: Rice shortage (+60% YoY), typhoon damage to vegetables
2. Core CPI (Ex-Fresh Food) 🎯 BOJ’s PRIMARY TARGET
Japanese name: “Core CPI” (コアCPI)
What it excludes: Fresh food only (fish, vegetables, fruit)
What it INCLUDES: Energy (gasoline, electricity, gas)
\[\text{Core CPI} = \text{All Items} - \text{Fresh Food}\]Why this is Japan’s main metric:
- Fresh food too volatile for policy decisions
- Energy prices reflect real purchasing power changes
- BOJ wants to capture “sustained” inflation including energy
Critical difference from US:
- US “Core CPI” excludes BOTH food AND energy
- Japan “Core CPI” excludes ONLY fresh food, KEEPS energy
Example (October 2024):
- Core CPI: +2.3% YoY
- Smoother than headline (excluded +60% rice spike)
3. Core-Core CPI (Ex-Food, Ex-Energy) 📊 Underlying Inflation
Japanese name: “Core-Core CPI” (コアコアCPI)
What it excludes: All food AND all energy
\[\text{Core-Core CPI} = \text{All Items} - \text{Food} - \text{Energy}\]What it measures: Underlying demand-driven inflation (wage-price spiral potential)
Why it matters:
- Shows whether inflation is sustainable (not just imported commodity prices)
- If Core-Core stays <1.5% while Core is 2.5%, inflation is “cost-push” not demand-driven
- BOJ hesitates to tighten if Core-Core is weak
Example (October 2024):
- Core-Core CPI: +2.1% YoY
- Interpretation: Domestic inflation strengthening (services prices rising)
Summary Table: Japan vs. US CPI Definitions
| Metric | Japan Definition | US Definition | Who Uses It |
|---|---|---|---|
| Headline CPI | All items | All items | Media headlines |
| Core CPI | Ex-fresh food ONLY | Ex-food AND energy | BOJ primary target (Japan) |
| Core-Core CPI | Ex-all food, ex-energy | N/A (use “Core”) | BOJ underlying inflation gauge |
| “Supercore” | Services ex-energy | Services ex-housing | Advanced analysis |
Trading pitfall: When US media says “Core CPI rose 3.2%,” they mean ex-food-and-energy. When Japanese media says “コアCPI 2.3%,” they mean ex-fresh-food-only. These are NOT comparable!
Historical Trends: The Three Measures in Action
Services Inflation: The BOJ’s Hidden Focus
While Core CPI gets headlines, the BOJ increasingly emphasizes services inflation as proof that wage gains are translating into sustained price pressures.
What Constitutes Services?
Services CPI components (~50% of total basket):
- Housing rent (20% of total CPI)
- Telecommunications (mobile, internet)
- Medical services (doctor visits, procedures)
- Education (tuition, lessons)
- Personal services (haircuts, dry cleaning)
- Recreation (movie tickets, gym memberships)
- Transportation services (train fares, taxis)
Why services inflation matters:
- Less volatile than goods (no commodity price swings)
- Wage-sensitive: Services prices rise when labor costs increase
- Domestically determined: Not affected by JPY exchange rate or import prices
- Sticky: Once services prices rise, they rarely fall (unlike energy)
Services vs. Goods Inflation Dynamics
Historical pattern (2012-2020):
- Goods inflation: +0.5% to +1.5% (driven by JPY weakness, oil prices)
- Services inflation: -0.2% to +0.5% (stagnant due to weak wages)
- Result: BOJ failed to achieve sustainable 2% inflation
Post-2022 shift:
- Goods inflation: +3.5% to +5.0% (imported inflation surge)
- Services inflation: +1.5% to +2.5% (wage growth finally passing through)
- Result: BOJ confident inflation is “sustainable” → YCC exit March 2024
Example (October 2024 breakdown):
- Goods CPI: +2.8% YoY
- Services CPI: +2.2% YoY ← This is what BOJ watches!
- Interpretation: Balanced inflation (not just import-driven)
Producer Price Index (PPI): Leading Indicator for CPI
Published by: Bank of Japan (not the Statistics Bureau)
Release date: ~8th of each month (for prior month)
What it measures: Prices received by domestic producers for their goods
PPI Components
Three stages of production:
- Raw Materials PPI: Crude oil, iron ore, agricultural commodities
- Intermediate Goods PPI: Steel, chemicals, processed materials
- Final Goods PPI: Finished products ready for consumers
Transmission mechanism:
\[\text{Raw Materials ↑} \rightarrow \text{Intermediate Goods ↑} \rightarrow \text{Final Goods ↑} \rightarrow \text{CPI ↑}\]Lag time: PPI changes take 3-6 months to fully pass through to consumer prices
Why PPI Matters for JGB Traders
Leading indicator signal:
- If PPI surges but CPI lags, expect CPI to catch up → Position for higher yields
- If PPI falls but CPI elevated, CPI will moderate → Buy JGBs ahead of peak
Pass-through dynamics:
- Strong pass-through (>70%): Tight labor market, high demand → BOJ concern
- Weak pass-through (<30%): Companies absorbing costs, weak demand → BOJ less worried
Example (September 2024):
- PPI: +2.8% YoY (down from +4.5% in March)
- Core CPI: +2.5% YoY (down from +2.7%)
- Interpretation: Disinflationary trend → JGB rally expected (and occurred: -5bp in 10Y)
GDP Deflator: The Alternative Inflation Measure
Source: Cabinet Office (released with quarterly GDP)
What it measures: Price changes across ALL goods and services in GDP (not just consumer purchases)
GDP Deflator vs. CPI
| Feature | CPI | GDP Deflator |
|---|---|---|
| Scope | Consumer purchases only | All GDP components (C+I+G+X-M) |
| Weights | Fixed basket | Variable (changes with economy) |
| Import prices | Included (consumers buy imports) | Excluded (GDP = domestic production) |
| Services weight | ~50% | ~65% (includes B2B services) |
| BOJ preference | Primary target | Secondary cross-check |
Key difference for Japan:
- When JPY weakens, import prices rise → CPI ↑ but GDP Deflator relatively stable
- GDP Deflator better captures domestic inflation pressures
Example (Q2 2024):
- CPI: +2.5% YoY
- GDP Deflator: +2.8% YoY
- Interpretation: Domestic inflation HIGHER than consumer inflation → Strong economy signal
Inflation Expectations: Forward-Looking Signals
Inflation expectations drive long-term JGB yields more than current inflation. If markets believe 2% inflation is sustainable, 30Y JGB yields must offer compensation.
1. Household Inflation Expectations Survey
Source: Bank of Japan “Opinion Survey on the General Public’s Views and Behavior”
Frequency: Quarterly
Question asked: “What do you expect inflation to be 1 year from now?”
Response format: Qualitative (rising/falling) and quantitative (% estimate)
Problem with this survey:
- Heavily biased by recent gasoline prices
- Overstates short-term, understates long-term expectations
- Limited usefulness for bond pricing
Example (Q3 2024):
- Household 1Y inflation expectations: +3.2%
- But actual CPI forecast (economists): +2.3%
- Households overestimate due to salience bias (focus on gas pump)
2. Market-Implied Inflation Expectations (Break-Even Inflation)
Calculation: JGBi yield - nominal JGB yield (see Chapter 2.9 for JGBi mechanics)
\[\text{Break-Even Inflation} = \text{Nominal JGB Yield} - \text{JGBi Real Yield}\]Example (October 2024):
- 10Y nominal JGB yield: 0.95%
- 10Y JGBi real yield: 0.25%
- 10Y break-even inflation: 0.70%
Interpretation:
- Market prices 0.70% average inflation over next 10 years
- Below BOJ’s 2% target → Market skeptical of sustained inflation
- If break-even rises to 1.5%, nominal JGB yields must rise proportionally
Trading application:
- Rising break-even inflation → Buy JGBi, short nominal JGBs
- Falling break-even → Opposite trade
3. BOJ’s Inflation Outlook (Outlook Report)
Published: Quarterly (April, July, October, January) with Monetary Policy Meeting
Format: Board members’ median forecasts for CPI over next 3 fiscal years
Why it’s critical:
- BOJ commits to maintain easing “until 2% achieved and sustained”
- If BOJ Outlook shows 2%+ for 3+ years → Policy normalization likely
- Market reprices entire JGB curve based on these forecasts
Example (October 2024 Outlook):
| Fiscal Year | Core CPI Forecast | Previous Forecast |
|---|---|---|
| FY2024 | +2.5% | +2.4% (July) |
| FY2025 | +2.1% | +1.9% (July) |
| FY2026 | +2.0% | +1.8% (July) |
Market reaction:
- Upward revision for FY2025-2026 → 2% “sustained”
- 10Y JGB yields jumped +8bp immediately after release
- Pricing in additional BOJ rate hikes in 2025
Historical Context: Japan’s Inflation Journey
The Lost Decades (1990-2012): Deflation
Average CPI: -0.1% annually
Causes:
- Asset bubble collapse (1991)
- Banking crisis (1997-1999)
- Strong JPY (export competitiveness lost)
- Demographics (aging population reduces consumption)
JGB market impact:
- Deflation → Real yields attractive even at 1-2% nominal
- JGBs became “widowmaker” short (yields only fell for 20 years)
Abenomics Era (2013-2019): Reflation Attempt
Policies:
- Aggressive QQE (BOJ balance sheet expanded 5x)
- Negative interest rates (-0.1% in 2016)
- Yield Curve Control (2016-2024)
Result:
- CPI rose to +1.5% by 2019… then fell back to 0%
- Failed to achieve sustained 2% inflation
- Reason: Wage growth remained <1% (inflation not demand-driven)
Post-Pandemic Inflation (2022-Present): Success?
Catalysts:
- Global supply shocks (energy, food)
- JPY depreciation (¥110 → ¥160 per USD)
- Wage growth breakthrough (2024 spring: +5.3%)
Key shift:
- Core CPI sustained above 2% for 24+ consecutive months (as of October 2024)
- BOJ declared “2% achieved” → YCC exit March 2024
- First sustained inflation in 30 years
JGB market transformation:
- 10Y yields rose from 0% (YCC cap) → 1.1% (free market)
- Volatility returned (3-7bp daily moves vs <1bp under YCC)
- Carry trades became viable again
Current State: Latest CPI Snapshot
Key Takeaways
- Core CPI (ex-fresh food) is BOJ’s primary target - includes energy, unlike US “core” definition
- Core-core CPI (ex-food, ex-energy) shows underlying inflation - BOJ needs this >1.5% for sustained policy tightening
- Services inflation is the key - wage-driven, sticky, domestic; proves inflation is sustainable
- PPI leads CPI by 3-6 months - use PPI as forward indicator for consumer price trends
- Break-even inflation from JGBi - market-implied expectations drive long-end JGB yields
- Historical context matters - Japan spent 30 years fighting deflation; 2% inflation is psychologically significant
Understanding Japan’s unique inflation metrics is essential for interpreting BOJ policy signals and positioning along the JGB curve.