Watching the Japanese core-core CPI

August inflation data are due Friday. Headline CPI is projected to slow further to 0.1% (YoY), down from 0.2% in the previous month. The Japanese style core CPI, which only excludes fresh food, is expected to fall to -0.1%, the first negative reading seen since Apr13 when the Bank of Japan introduced the new QE program. Weakness in these two price measures shouldn't come as surprise, given the decline in global commodity prices last month amid intensifying worries about China's slowdown and Fed rate hikes. 

More attention should be given to the "core-core CPI", which strips out the volatility in both food and energy prices. The core-core CPI has maintained a mild uptrend so far this year, thanks to the pickup in wage growth and the fall in unemployment. The BOJ has said that it now focuses on the underlying inflation that excludes both food and energy. Should the core-core CPI stop rising and start to show a downtrend, the BOJ would face substantial pressures to expand QE at October's meeting. 

"Our expectation is for the core-core CPI to remain stable at 0.7% in Aug15, which should still allow the BOJ to maintain a neutral stance on monetary policy", says DBS Group Research.