Excluding Tax Increase, Japanese Consumer Prices Are Already Back in Deflation

The recent sales tax increase in Japan is wreaking havoc with price statistics, making year-over-year comparisons basically useless. To address this problem we have begun to make a very simple adjustment to the published price stats which is to subtract the impact of the tax increase starting in April 2014. The one important assumption we are making is that the full 3% sales tax increase is being passed onto the consumer.

As the chart below shows, when we adjust for the tax increase consumer prices in Tokyo are already posting negative readings on a year-over-year basis through June (the blue line is our adjusted statistic). If this trend continues the probability of BOJ doubling down on asset purchases in the fall months will increase dramatically.