Revealing Japan's CPI Fluctuation Mechanisms via a Time-Varying Factor Loading Model

In this article, we examine the dynamic interdependencies among components of Japan's consumer price index (CPI) using a two-lag time-varying factor loading (TLTVFL) model. Whereas previous studies have typically decomposed CPI series into long-term trends, seasonal patterns, and cyclical fluctuations, such approaches mainly describe structural features without fully uncovering the latent mechanisms that drive price dynamics. The proposed TLTVFL framework addresses this limitation by allowing both factor loadings and their lagged effects to evolve over time, thereby capturing gradual structural changes and the time-varying propagation of shocks across CPI categories. Using monthly data for ten major CPI categories from January 1970 to December 2024, we identify evolving common factors, category-specific sensitivities, and dynamic transmission patterns associated with major macroeconomic events. The findings reveal substantial temporal variation in inter-category linkages, offering fresh insights into sectoral contributions to inflationary pressures and providing policy-relevant implications for more effective monetary and fiscal interventions. Methodologically, this study extends the frontier of dynamic factor modeling, while empirically, it deepens the understanding of the mechanisms underlying price fluctuations over a long historical horizon.