Morgan Stanley Fixed-BoJ Watch BoJ Policy Analysis (Trend Inflation) Our Though...-108409439.pdf

MMorganBoJWatch|JapanBoJPolicyAnalysis(TrendInflation):OurThoughtsonthePolicymaker’sViewWesummarizedourthoughtsontheBoJ’strendinflation.TheBoJ’sestimatedtrendinflationcanbelinkedtospringwagenegotiationresultsandmayrisefurtheronceShuntooutcomeisreflectedinwagedata.MorganStanleyMUFGSecuritiesCo.,Ltd.MasayukiInuiEconomistMasayuki.Inui@morganstanleymufg.com+8136836-5407TakeshiYamaguchiChiefJapanEconomistTakeshi.Yamaguchi@morganstanleymufg.com+8136836-5404Forimportantdisclosures,refertotheDisclosureSection,locatedattheendofthisreport.KeyTakeawaysWethinkmodel-basedtrendinflationwouldgetmoreimportanceinassessingtheunderlyinginflationtrend.TheBoJ"scurrentestimationframeworkcoversawiderangeofapproaches,allowingflexiblediscussionwithkeypeoplewhohavevariouspreferencesattheBank.Quasi-structuralmodel"strendinflationestimatecanbelinkedtoShuntoresultsandmayrisefurtheronceShuntooutcomeisreflectedinwagedata.ImportanceoftheBoJ"sexistingunderlyinginflationmeasures,suchastheweightedmean,inmonetarypolicydiscussionsisrelativelydeclining.May27,202410:00AMGMTMUpdate2BoJPolicyAnalysis(TrendInflation):OurThoughtsonthePolicymaker’sViewGrowingimportanceoftrendinflationinassessingunderlyinginflationInourrecentlypublishedBoJpolicyanalysisreport,weshowedthatthetrendinflationratehasrisentoroughly1.5%andcitedthegrowingimportanceofthisrateinassessingunderlyinginflation(Exhibit1,BoJWatch:AprilBoJOutlookReport:OurThoughtsonthePolicymaker’sViewaboutitsPolicyAnalysis(1May2024)).Wereceivedmanyinquiriesfrominvestorsonthispointandhenceadditionallydiscussourimpressiononpolicymaker"sviewsforotherBoJtrendinflationmodelstoo.Ourpreviousreportaddressedtheimportanceof"model1estimates"inidentifyingstructuralchangeincorporateprice-andwage-settingbehaviors.Practicallyspeaking,policymakers,however,needtoconsiderthepossibilityofpotentialarbitrarityonanalysisduetothemodelspecificationofstructuralmodelssuchasmodel1.Thusitwouldmakessenseinpolicydiscussiontoalsodiscussbasedonreduced-formmodels.Inthispoint,estimatedtrendinflationof"Model3",aquasi-structuralmodelthatfactorsinreduced-formperspective,wouldbeuseful.TheBank’sMonetaryAffairsDept.originallydevelopedthebaseofmodel3,andbygoingbackevenfurther,themodelpremisesitselfonamodelformulatedinajointprojectbyvariouscentralbanksunderformerFedChairBenBernankeandformerIMFChiefEconomistOlivierBlanchard.Model3isbasedonastructuralVARmodelwiththeinflationrate,short-termandlong-terminflationexpectations,andthewagegrowthtoestimatethetrendinflationrate(Exhibit2).Exhibit1:AprilBoJOutlookReportChartB4-5:EstimatedTrendInflationSource:BoJ,MorganStanleyResearchMUpdateMorganStanleyMUFG3Model3’strendinflationestimatecanbelinkedtospringwagenegotiationresultsandmayrisefurtheronceShuntooutcomeisreflectedinwagedataItwouldbeimportanttonotethatthemodel3canlinkotherimportantfactorssuchasShuntowhilereducingapotentialarbitrarityarisingfromspecificstructuralmodelsetting.Forexample,themodel3utilizesscheduledcashearningsinthemonthlylaborsurvey,whichexhibitshighcorrelationtobase-payinc