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Economy

Big data makes big changes in how Japan's central bank looks ahead

TOKYO -- Big data is helping the Bank of Japan's research and statistics department be more confident, as the department's economic forecasts have been proven right, and ever more accurate.

     Since last autumn, Japan's central bank has been using big data to analyze as many as 500 economic statistics in depth, looking for disturbances in the economy to aid monetary policy. The research and statistics department is playing an increasingly important role at the bank as BOJ policy board members demand ever more accurate data and analyses.

     According to preliminary data released in mid-February by the Cabinet Office, Japan's real gross domestic product for the October-December quarter rose at an annualized 1% on the year. The figure fell below market expectations of 2.7%, but the central bank had the view that it would be around 1%. In other words, the BOJ's prediction was right, and those from the private sector were not.

     The European Central Bank also uses big data in its economic assessments.

     The BOJ has become capable of forecasting GDP announcements a month in advance, said Naoko Hara, who is involved in macroeconomic analysis at the research and statistics department.

     GDP rates are forecast by analyzing a broad range of statistics, such as the industrial production index and tertiary industry activity index. Big data technologies have made it possible that these stats can be crunched in time for quarterly GDP numbers a month ahead of official announcements. For example, October-December GDP can be estimated with just October and November data, which are available the following January -- and the existing data allows the BOJ to forecast December's GDP figure.

New ways to be ready

Predicted values can be made even more accurate as data is adjusted after economic readings are released.

     Seisaku Kameda, head of the economic research division under the BOJ's research and statistics department, said the bank can now create economic forecasts through a completely different approach. Before, the BOJ manually accumulated such data.

     The BOJ's monetary affairs department, which is involved with the bank's monetary policy, is growing increasingly reliant on the research and statistics department. According to a senior official at the monetary affairs department, the statistics department has so far missed by only a few tenths of a percentage point when it comes to forecasting the consumer price index over the next three months.

     Last April, the BOJ said the country's inflation rate, which was in negative territory, would rise to 0.7% for the fiscal year through March 2014. Market watchers thought this too bullish. But the BOJ prediction has been proving right.

     Inflation, however, can be greatly affected by the yen's strength or weakness and by energy prices. A BOJ executive said the bank got lucky in accurately predicting the inflation figure. Such factors that can easily push up inflation will gradually disappear in spring and beyond. The hard part for prediction is yet to come.

     BOJ Gov. Haruhiko Kuroda has been suggesting at press conferences and other occasions that the bank will introduce additional easing if economic gauges fall below the bank's scenarios. The BOJ's monetary policy has been historically passive. If the BOJ becomes capable of making preemptive moves, this could change.

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