Japan may be at an inflection point in its 25-year battle with deflation as price and wage rises show signs of broadening, the government said on Tuesday, signalling its conviction the economy was nearing an end to prolonged stagnation.
The optimistic view echoes that of the Bank of Japan (BOJ), which has said corporate price- and wage-setting behaviours were changing and could pave the way for phasing out the country’s massive fiscal and monetary support.
“Japan has seen price and wage rises broaden since the spring of 2022. Such changes suggest the economy is reaching a turning point in its 25-year battle with deflation,” the government said in its annual economic white paper.
“We shouldn’t dismiss the fact that a window of opportunity may be opening to exit deflation” as inflation perks up and public perceptions about persistent price declines abate, it said.
The report stopped short of saying Japan has fully eradicated the risk of deflation returning, pointing to a “still moderate pace” of increase in services prices. “In determining the trend of inflation, it’s important to look at services prices” as they reflect domestic demand and wages more vividly than goods prices, added the report.
In the 2022 report, the government said inflation was modest except for a handful of food and energy-related goods. The government said there are four key indicators to watch to gauge the state of deflation – consumer price index, gross domestic product deflator, output gap and unit labour cost. All of them have turned or are estimated to have turned positive.
The change in tone on deflation risks underscores the government’s shifting priorities, as rising commodity costs and a tightening job market push up inflation and heighten public worries over higher living expenses.
Japan’s core inflation hit a four-decade high of 4.2 per cent in January and remained above the BOJ’s 2 per cent target for 16 straight months in July, as more companies pass on higher raw-material costs.
In 2023, companies offered their highest pay in three decades, heightening the case for a retreat from decades of ultra-loose monetary policy.
But the government has refrained from declaring an end to deflation, arguing that doing so requires not just underlying price rises but also clear signs Japan will not return to periods of price falls.
“We need to eradicate the sticky deflationary mindset besetting households and companies,” the report said, adding that the government must work closely with the BOJ to achieve sustained wage growth. Since declaring Japan to be in a state of deflation in 2001, the government has made ending price falls among its top policy priorities. The focus has led to years of big fiscal spending to prop up the economy, and kept pressure on the central bank to maintain ultra-loose monetary policy.
Calling victory over deflation will also bring market focus to the 2013 joint statement between the government and the BOJ. That was a key reason why then BOJ governor Haruhiko Kuroda launched his shock-and-awe stimulus bazooka strategy and stuck with the approach for a decade.
The title of the statement said it is for “overcoming deflation and achieving sustainable economic growth”, suggesting the need for revision once deflation is over.
BOJ governor Kazuo Ueda and Prime Minister Fumio Kishida agreed to leave the joint statement unchanged on April 10, the first business day after the governor took the central bank’s helm.
The BOJ adjusted its yield-curve control programme in July to prepare for upside inflation risks, while denying it was an unwinding of stimulus. When the bank normalises policy, close communication with the government is likely required after past exits were widely criticised as being too early. – Reuters –