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Japan May Understate Deflation, Hampering BOJ, Economist Says

The Bank of Japan may not be able to overcome deflation even if price increases reach its 1 percent target because government data understates declines in the consumer price index, a former BOJ official said.

“There’s a possibility prices may still be falling” even if consumer prices increase 1 percent, Tsutomu Watanabe, a Tokyo University economics professor who used to work at the central bank, said in an interview in Tokyo this week.

Japan’s consumer price figures use a fixed base year to measure price changes, affecting the accuracy of the data the further the numbers get from that year, Watanabe said. Countries like the U.S. measure against a changing base year that can more accurately capture underlying trends, he said.

Watanabe said sampling he has conducted at supermarkets tracking prices and volumes of items sold using cash register data suggest that consumer prices could be falling more than suggested by the government’s figures, which are only compiled through sampling conducted manually.

While official data show that the consumer price index has fallen at an annual rate of about 1 percent in the past 10 to 15 years, Watanabe said his sampling methods suggest that those declines are bigger, sometimes as large as 2 percent.

Since setting the inflation target in February, the BOJ has pledged to pursue “powerful monetary easing,” including through keeping interest rates close to zero, until the goal of 1 percent year-on-year increases in the consumer price index are in sight. Prices by that gauge fell 0.1 percent in January. The BOJ should clarify the logic behind selecting the 1 percent target, Watanabe said.

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