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Economy

BOJ taking a sad CPI, making it better

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda was at it again on Monday. "The underlying inflation trend has been improving steadily," he iterated. This time, however, he repeated the refrain at least four times in a single speech.

     In front of about 300 business leaders at a meeting in Osaka, Kuroda sounded more confident than usual. He said the BOJ will "continue to strongly commit itself to overcoming deflation and to achieving its price stability target of 2%."

     That is BOJ-speak for consumer prices increasing at a 2% clip.

     The BOJ, Kuroda said, will "definitely and decisively play its role."

     Kuroda then concluded his remarks by promising that the central bank will reach its goal.

     While the speech could end up painting the BOJ into a corner, Kuroda was showing resolve, no doubt trying to encourage those in his audience to increase their capital spending and raise wages.

     The bank expects to reach its inflation goal around the first half of fiscal 2016.

     Three days before the meeting, the Ministry of Internal Affairs and Communications released the nation's consumer price index for August. The CPI excluding volatile prices of fresh foods was down 0.1% from a year earlier, the first decline in two years and four months. But if energy is also excluded, the CPI rose 1.1% on the year, achieving its highest growth since April 2013, when the bank announced a new round of quantitative easing.

     This second result puts the wind at Kuroda's back.

     The BOJ began referring to this self-calculated CPI in July. The logic is that it takes into account falling crude oil prices and the impact they are having on inflation. BOJ officials are increasingly supporting their own version of the CPI, saying it is the most accurate and the easiest to understand when measuring inflation. During a post-meeting press conference, Kuroda also said the index shows an underlying inflation trend.

     The index reached its 2014 peak in February, at 0.9%. It later lost momentum, showing prices rising at only a 0.5% clip by the end of the year. The downward trend partially reflected the impact of a consumption tax hike that came in April of that year.

     Since spring, the BOJ's index has been increasing, this time echoing the rising costs of food and daily necessities.

     It was up 0.4 of a percentage point for the two months through August.

     "The price changes this year," Kuroda said, "present a clear contrast with those from last year."

     With the trend now meeting the central bank's expectations, one BOJ official sighed, "I feel a bit relieved."

Riding a rough sea

Even though prices are trending up in the BOJ's favored CPI, the index is only halfway to the bank's 2% inflation goal. If the BOJ is to get to its target, price increases need to pick up speed.

     And yet, external factors have been worsening. Since this summer, for example, the yen has stopped falling, emerging economies have been slowing and the global equity market has been increasingly volatile.

     In the bank's view, its preferred CPI will rise further as corporate earnings and employment improve. The question is how long the index can maintain its momentum this time.

     On the flip side, if the CPI, excluding fresh food and energy costs, struggles to rise, the BOJ will have no room to blame falling oil prices. If this happens, it would wound the BOJ's confidence in its ability to create a virtuous cycle in which incomes rise and spending follows.

     And Japanese would lose faith in Kuroda's mantra.

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