Core Indicators of Japan's Consumer Price Index

The primary objective of the Bank of Japan (BOJ) in conducting monetary policy is to promote sustainable growth by achieving price stability. The price stability that needs to be achieved is regarded as not just short-term and temporary, but sustainable in the medium to long term, which is the common understanding among major central banks. To fulfill this mandate, the BOJ is required to identify the underlying trend of inflation by excluding various idiosyncratic disturbances from measured price developments in price indexes. This paper examines the effects of idiosyncratic disturbances on Japan's consumer price index (CPI), computes several core indicators to capture the underlying trend of inflation, and compares their performances. Empirical evidence reveals that the CPI excluding fresh food and 10-percent trimmed mean show somewhat better performances than other indicators in terms of tracking the underlying trend of inflation and forecasting the future direction of headline inflation. In examining consumer price developments, it is thus deemed important to monitor various indicators, including the CPI excluding fresh food that has drawn most of the focus. This enables us to identify the underlying trend of inflation by capturing the nature and size of idiosyncratic disturbances behind consumer price dynamics.