| 24 July 2024, Wednesday |

Japan at ‘inflection point’ in 25-year battle with deflation, government says

Japan’s 25-year war with deflation may be nearing an end, as price and wage hikes show indications of expanding, the government said on Tuesday, signaling its belief that the economy is nearing the end of its extended stagnation.

The hopeful perspective is shared by the Bank of Japan (BOJ), which has stated that business pricing and wage-setting behavior is changing, which might pave the way for the country’s substantial fiscal and monetary assistance to be phased out.

“Since the spring of 2022, Japan has seen a broadening of price and wage increases.” Such improvements indicate that the economy is nearing the end of its 25-year war with deflation, according to the government’s annual economic white report.

“We shouldn’t dismiss the fact 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, the report said.

Except for a few food and energy-related items, the government stated in last year’s report that inflation was moderate.

The shift in tone on deflationary concerns reflects the government’s shifting objectives, as increasing commodity prices and a tighter labor market drive up inflation and heighten public concern over growing living costs.

Core inflation in Japan reached a four-decade high of 4.2% in January and stayed over the BOJ’s 2% goal for the 16th consecutive month in July, as more companies pass on higher raw material prices.

Companies paid their highest wages in three decades this year, bolstering the case for a shift away from decades of ultra-easy monetary policy.

But the government has refrained from officially declaring an end to deflation, arguing that doing so requires not just underlying price rises but clear signs that Japan won’t return to periods of price falls.

“We need to eradicate the sticky deflationary mindset besetting households and companies,” the report said, adding the government must work closely with the BOJ to achieve sustained wage growth.

Since declaring Japan 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.

  • Reuters