Friday, March 13, 2015

Japan inflation update

The Q4 GDP number is available for Japan so here are the model updates including the new monetary and price level data. I've adjusted the Japanese core CPI for the VAT tax increases [1] in 1997 and 2014.

The prediction for Japan uses the same procedure as for the US predictions (see e.g. here), however I've integrated the inflation prediction errors to generate an error band for the price level (hence the size of the error will grow over time).

Here is the full (un-smoothed) model:

Here is the smoothed result:

And here is the prediction using the smoothed result:

Basically this prediction says inflation will be approximately zero for the next 10 years, barring any re-definition of the Yen.


[1] Here are the unadjusted versions:


  1. "Basically this prediction says inflation will be approximately zero for the next 10 years, barring any re-definition of the Yen."

    How about a friendly bet. I bet you have under estimated the inflation in Japan over the next 10 years. In fact, I will bet that there is double digit inflation within 2 years so if they stay under 5% you are closer to right than me. Full payment is a post on losers blog saying the other person was right. Deal?

    1. Sure thing, Vincent.

      The latest reading (January) is here from FRED:

      shows the price level at 100.53443 (I divided by 100 in the graphs above, and that is unadjusted for the VAT increases in 1997 and 2014).

      5% inflation continuously compounded for two years would bring the price level to:

      100.53443 exp(0.05*2) =


      for the January 2017 reading.

      There may be an additional VAT increase coming in the next couple of years, but I imagine even with that shift, the price level increase will stay below 5% (continuously compounded annual rate).

      As the prediction of 111.10773 is well off the top of my graphs above, I will actually cede the bet if the price level goes off the top of the graph (107.0, or 3% inflation, continuously compounded) before 2017.

      Basically, the information transfer model is solidly wrong in that case, and I'd probably just close up shop if that were to happen.

    2. Not sure you would need to close up shop, but you might need to realize that hyperinflation is very different thing than normal inflation.

    3. Can you get data to try your theory on the last few years in Venezuela, Argentina, and Brazil?

    4. Most of the data series on the internet are not frequent enough or long enough to build a decisive model. I did look at Argentina, but wasn't able to say much about it except that it was not inconsistent with hyperinflation -- which I agree is a different animal.

    5. If your theory works for normal inflation and fails for hyperinflation it is still a very useful theory. Most of the time most countries are not having hyperinflation.

    6. In fact, if when a countries inflation fails to follow your model it turns out to be an early warning of hyperinflation, it could even be very useful in the hyperinflation case.

    7. Have you looked for data for Russia and Ukraine for the last few years?

    8. Sorry about the delay Vincent -- I was on vacation when you left these and haven't gotten back you to until now.

      When I said that the model didn't say much about Argentina that was due to a lack of data (it is ambiguous), not due to the model giving bad results (it's not wrong). A longer time series would help determine the details of the hyperinflation episode.

      Regarding Russia and Ukraine -- I haven't updated the Russia model in awhile and I am not seemingly able to find good currency data for Ukraine. Russia seems normal, but this is before the conflict ...


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