Japanese Inflation 2% Lower than Reported
Wednesday, July 18, 2007 Posted: 01:58 PM JST
New research suggests that actual Japanese inflation is almost 2% below the reported figures, according to highly respected financial analyst Richard Jerram of Macquarie Securities. "Measuring inflation accurately is a remarkably complicated exercise where the process used can distort the results. New academic research suggests the calculation used in Japan results in inflation being overstated by 0.8%, compared to the results from using the more sophisticated US process."
Jerram says that the Bank of Japan and the Japanese Ministry of Finance have contrasting interests in the view that Japanese inflation is overstated by 1.8%. "It should be unwelcome news to the Bank of Japan, which has embraced an unusually hawkish definition of price stability being a 0–2% rate of inflation. However, it should be welcomed by the Ministry of Finance if the bias can be addressed, because many government social expenditures (such as pensions) are tied to the inflation rate. ... there would be fiscal savings if a lower inflation rate is used, which gives the MOF an interest in pushing for a revised calculation process."
In a recent paper by Christian Broda and David Weinstein, they argue that Japanese methodology leads to inflation being seriously overstated.
"According to Broda and Weinstein," says Jerram, "inflation in Japan would be running at around -1.0% (as it is overstated by 0.8%) using the more sophisticated US methodology. This is significantly below the BOJ’s definition of price stability and provokes the thought that the next move in rates should be down, not up."
Calculating inflation is done differently by different countries. "The two main differences between the US and the Japanese approaches," says Jerram, "are that the US adjusts better for consumers substituting between products as relative prices change, and because the US uses quality adjustments on a wider range of products."
* * *