The Bank of Japan’s own inflation measure lands tomorrow — national figures point to a rise.

What to expect

The Bank of Japan publishes its own measure of core inflation for September tomorrow. It strips out all food, energy and one-off effects of government policy, so it is the cleanest read on the trend the Bank actually sets rates on. It was 1.8% in August, still under the 2% target. National figures out last week showed underlying prices jumping, so a rise looks likely; the question is whether it reaches 2%. If it does, it answers the two Bank members who voted against September’s rate rise because inflation was below target — and leans the yen higher towards a possible rise in December.

Why Japan has several inflation numbers

Japan publishes inflation three ways, and each answers a different question.

National CPI — the whole country, from the government’s statistics bureau, about three weeks after the month ends. It comes in three versions, and the naming catches people out:

Headline — everything.

Core — excludes fresh food but still includes energy. In most countries “core” removes energy. In Japan it doesn’t.

Core-core — excludes fresh food and energy. This is closest to what other countries call core.

Tokyo CPI — the same survey for central Tokyo only, published at the end of the month it covers, about three weeks before the national figure. It is the earliest read on where national inflation is heading.

The Bank of Japan’s core measure — calculated by the Bank itself from the national price data, a few days after the national release. It goes further than core-core: it removes all food, not just fresh food, and strips out the effect of government policy changes such as subsidies.

So the split is about speed (Tokyo first), coverage (national), and purity (the Bank’s own, with policy distortions removed). The Bank sets rates on the underlying trend, which is why its own measure carries the most weight with it.

What’s expected

Bank of Japan core, September: no published consensus. August was 1.8%, July 1.6%.

Already out — national, September: core 2.1%, from 1.7%; core-core 2.4%, from 1.9% and above the 2.3% expected.

Forecasters have come in too low on this measure in each of the last three months.

Why it matters

The Bank raised its rate to 1.25% in September by seven votes to two. The two who voted against argued inflation was still below target. On the Bank’s own core measure they were right — 1.8%. If it reaches 2%, that argument goes.

The Bank decides again on Friday 30 October, with new forecasts. A hold is expected, with December the live meeting. A strong reading tomorrow makes it more likely the Bank uses Friday to point towards December. Higher expected rates make the yen more attractive to hold.

If it reaches 2% or above

Underlying inflation at target on the Bank’s own measure. December firms up as the next rise, and the yen gets support.

If it rises but stays below 2%

Progress, but the two dissenters keep their argument. December stays possible rather than likely, and the support for the yen is limited.

If it stalls near 1.8%

That would sit awkwardly against national core-core at 2.4%, and suggest the jump came from items the Bank strips out. December becomes harder to argue, and the yen softens.

The lean

Hawkish. Underlying prices jumped in the national data, and forecasters have been too low on this measure three months running. A reading at or near 2% is the more likely surprise.

How to trade it

Before — getting flat only if the yen is stretched into the release. Otherwise nothing.

At the release — no entry.

After — a short reaction window. Tokyo inflation and the Bank of Japan decision both land on Friday 30 October, so any reaction trade has to be closed before Friday.

Sources

Forex Factory — BOJ Core CPI definition and history · investingLive — national September CPI, September vote · Business Standard — what the Bank’s underlying measures are for · Rio Times — October hold, December in play · Finance Calendar — decision date and Outlook Report