Japan Clears Key Threshold to End Deflation, Minister Reveals

Image Credit: Bloomberg

Japan has met the key conditions needed for the government to officially declare an end to long-term price deflation, according to Economy Minister Ryosei Akazawa on Friday. This statement reflects the government's optimistic view of the economic outlook, which could influence the timing of the Bank of Japan’s next interest rate hike.

While inflation has been above the central bank's 2% target for nearly three years, Japan has yet to officially announce the end of its "deflation" period, which is characterized by economic stagnation and slow wage growth that keeps consumption low.

Akazawa noted that all four major indicators used to assess whether Japan has exited deflation have turned positive, including recent data showing that Japan's output gap became positive in the last quarter of the previous year. He expressed hope that the Bank of Japan will continue to work closely with the government to maintain its policy guidance and sustainably reach the 2% inflation target.

The government’s recent estimate showed Japan’s output gap turned positive for the first time in six quarters, indicating that demand was strong enough to push actual output beyond the economy's full capacity. In addition to the output gap, the government monitors three other indicators—consumer price index, GDP deflator, and unit labor costs—to determine if Japan has fully emerged from deflation.

The Bank of Japan ended its decade-long massive stimulus program last year and raised interest rates to 0.5% in January, signaling progress toward a sustainable 2% inflation target. However, the government has been cautious about declaring deflation over, as such a declaration might limit the justification for further fiscal stimulus. Analysts suggest that formally ending deflation could also boost the government politically ahead of the upcoming upper house election in July.

Paraphrasing text from "Reuters" all rights reserved by the original author