Japan Government To Change Inflation Calculation Ushering In Even More BOJ Liquidity

Tyler Durden's picture

When it comes to changing the "measurement" rules in the middle of the game, nobody does it quite like Japan: in the aftermath of the Fukushima nuclear explosion, when radiation was soaring (and still is with Tritium levels just hitting a record high but who cares - Goldman partners have to earn record bonuses on the back of the irradiated island) Japan's solution was simple: double the maximum safe irradiation dosage. Done and done. Now, it is time to do the same to that other just as pesky, if somewhat less lethal indicator: inflation. Reuters reports that the Japanese government plans to adopt a different measure of inflation to the central bank's.

The official explanation for this upcoming adoption of core-core-CPI which also excludes energy prices in addition to fresh food costs (as core CPI does everywhere else in the world) is to "raise the bar" on Abe's inflation goal. In reality, it will simply grant the BOJ unlimited ammo to continue injecting liquidity indefinitely because absent exploding energy costs (as we have discussed), inflation in Japan is quite dormant. But what will really happen is that inflation will merely become just one more governmentally-determined and goalseeked economic indicator and policy tool, as it is in the US and China.

Reuters explains:

Whereas the central bank targets a 2-percent year-on-year rise in the core consumer price index, a measure that excludes volatile prices of fresh food, the government plans to use "core-core" CPI, which also excludes energy costs.

 

The change will effectively raise the bar for Abe's inflation goal, as it means that higher energy prices will be taken out of the equation.

 

The official, who was involved in the decision to switch to "core-core", said the change was meant to help ensure that the world's No. 3 economy truly breaks the grip of deflation.

 

"Unless we have price rises that aren't temporary, that won't reverse, we can't say we've escaped from deflation," the official said on condition of anonymity.

 

The change could result in more pressure being put on the central bank to keep flooding the market with yen as the inflation target becomes harder to achieve.  It could also complicate the government's plans to raise the nation's sales tax.

 

The BOJ has vowed to continue its massive easing -- which includes doubling the money supply through enormous purchases of government bonds and other assets --to generate modest inflation over the next two years.

 

Core CPI stopped falling in May, the latest reading, and many economists expect it to gradually rise above zero. But the apparent fade in deflation partly reflects higher prices for imported oil and natural gas as a result of the weaker yen and the shutdown of nuclear power plants after the 2011 earthquake and tsunami.

 

In contrast, core-core CPI, although it has slowed its declines, remained down 0.4 percent on year in May. Some economists expect this measure to turn positive by year's end, but the government official said that might be optimistic.

 

Indeed, government data may understate the persistence of deflation.

In the meantime, "in hedonic  djustments we trust."

Prices of 32-inch televisions, which are included in the CPI basket, have stopped falling, but price competition has merely shifted to larger-screen TVs, said an official at electronics mass-retailer Bic Camera Inc .

 

Similarly, McDonald's Holdings Co. (Japan) recently grabbed attention by raising prices on hamburgers and cheeseburgers, but a spokesman said the fast-food giant has cut prices of chicken nuggets and small fries.

Finally, since the proposed change means even more monetization of debt, Japan has realized that since it doesn't need to actually raise tax revenues as the central bank will fund the country's ridiculous budget deficit indefinitely or until such time as the party ends, it can scrap the proposed doubling of consumption tax to 10% in the coming years.

Bottom line, win win for everyone: Abe is happy because the people like him due to his tax-cutting measures, the centrally-planned stock market continues soaring in current nominal terms due to the endless dilution of the currency and the monetization of securities by the BOJ, and Goldman's bonuses hit another record. And all it took was the perversion of yet another meaningless and now manipulated economic data indicator.

In the meantime, that this kind of pulling up by the bootstraps economic utopia does not work, and one can't print one's way to prosperity is lost on everyone. But why care: in the end, everyone knows that Japan is finished - after all . May as well enjoy the here and now.

As Kyle Bass simply says: "Shikata ga nai."