Inflation Hawks Given More Ammo by New BOJ Measurements

What Does This Mean for BOJ’s Target Interest Rates?

Key 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, core inflation is closer to the BOJ’s 2% goal, thereby justifying more interest rate hikes

·       More problematic are new estimates of 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, I believe the BOJ will move cautiously

For details and analysis, see