By Shigeo Kodama

TOKYO (MNI) – Economists forecast that the revision to Japan’s
consumer price index formula to be announced by the government next
month will cut the year-on-year change in the core inflation reading by
about 0.7 percentage point, according to a survey conducted by Market
News International.

But some economists said they are not sure about the effect of the
change until they see the details of the revised basket of goods and
services because it is still unclear the exact type of service the
government will target in surveying mobile carrier fees, utility charges
and air fares.

The government will switch the base year for the consumer price
index to 2010 from 2005 as well as revise the basket of goods and
services used for calculating CPI and change the weighting of items
within the basket to reflect changing consumer preferences for high-tech
items and diversifying lifestyles in a fast-aging society.

It will announce revised monthly national CPI data for the period
from January 2010 to June 2011, and for Tokyo for the period January
2010 to July 2011, under the 2010 base year at 1700 JST (0800 GMT) on
Aug. 12. It will release the July national and August central Tokyo CPI
under the new formula at 0830 JST on Aug. 26 (2330 GMT Aug. 25).

The Ministry of Internal Affairs and Communications said Friday it
is giving a significantly larger weighting to consumer electronics in
the basket under the new 2010 base year. This move that will depress
overall consumer prices since electronics prices have tended to decline.

The median economist forecast for a 0.7 percentage point drop is
larger than the 0.5 percentage point fall in the CPI revamp of five
years ago, mainly because retail markdowns of household electronics has
outpaced those for other surveyed items.

In order to correct an upward bias that the fixed index tends to
show as time passes from the base year, the ministry updates the CPI
base year every five years.

The weighting allocated to televisions will be 97 against the
basket total of 10,000 in the new 2010 base year, up from 37 under the
formula fixed to 2005 price levels.

Air conditioners will also get a bigger share of 36 out of 10,000,
up from 20, while the weighting for refrigerators will rise to 21 from
17.

The reallocation of the weighting among various goods and services
reflect a surge in demand for those household appliances on the back of
the government’s reward program for buying household appliances that
require less power to operate. The program lasted from May 15, 2009 to
March 31, 2011.

Market participants are closely watching the revamp of the data as
the revision five years ago caused market gyrations. The revision at
that time pushed down the core CPI annual rate by 0.5 percentage point,
much larger than the market consensus for a 0.2-point drop.

Five years ago, mobile phone charges pushed down the y/y change in
the official core CPI by 0.13 percentage point, and flat-panel TVs, a
newly adopted item at the time, lowered it by 0.07 percentage point.

Then, the weighting of mobile phone charges was raised to 208
against the basket total of 10,000 in the 2005 base year, up sharply
from 74 in the 2000 base year.

If MNI survey’s median forecast is met, the national core CPI,
which excludes fresh food but includes energy, may slip back into
negative territory.

Under the current formula, the nationwide core CPI rose 0.6% in May
from a year earlier, the same rate as in April, when it posted the first
y/y rise since December 2008. June national CPI data under the 2005 base
year is due to be released on July 29.

“The Bank of Japan will be urged to take additional easing
measures” if the y/y change in core CPI is again negative under the new
formula, said Takehiro Sato, chief economist at Morgan Stanley MUFG
Securities.

Yasunari Ueno, chief market economist at Mizuho Securities, said
that a negative CPI figure “would prompt buying of Japanese government
bonds.”

Prospects for near zero growth in CPI would rekindle fears of
lingering deflation and thus a slow economic recovery that would cause
the Bank of Japan to maintain its very stimulative monetary policy for
longer than previously expected, Ueno said.

But he added that JGB buying may not be as pronounced this time as
it was five years ago, when investors were more sensitive to price
movements because the BOJ was expected to continue normalizing interest
rates after its July 2006 rate hike.

After seeing slight CPI gains in early 2006, the BOJ, as it had
promised, ended its five-year-long quantitative easing policy in March
2006 and hiked rates for the first time in more than six years in July
that year.

The bank took those actions before the government revised the CPI
data in August 2006.

Core CPI rose 0.5% y/y in March 2006 and 0.6% in July under the
2000 base year, but gained only 0.1% in March and 0.2% in July under the
2005 base year (it even fell 0.1% in April and was flat in May).

skodama@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4838 **

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