The Japanese government said on Tuesday that it believed the country’s economy was close to emerging from a protracted period of stagnation and that Japan may be at a turning point in its 25-year struggle with deflation as price and wage growth show indications of widening.

The upbeat outlook reflects that of the Bank of Japan (BOJ), which said that corporate wage- and price-setting behaviour was shifting and would open the door to gradually ending the nation’s significant 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 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 research noted a “still moderate pace” of increase in service prices but refrained from concluding that Japan has completely eliminated the risk of deflation returning.

“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.

The government stated in the report from the previous year that, with the exception of a few food and energy-related items, inflation was moderate.

The government’s shifting priorities are shown by the shift in tone about deflation threats as rising commodity prices and a tighter labour market drive up inflation and fuel public anxiety about growing living costs.

As more businesses pass on rising raw material costs, Japan’s core inflation reached a four-decade high of 4.2% in January and stayed above the BOJ’s 2% target for 16 straight months in July.

The highest compensation paid by businesses in three decades was offered this year, which strengthens the argument against continuing decades of ultra-loose monetary policy.

However, the government has held off on formally announcing the end of deflation, claiming that doing so necessitates both underlying price increases and unmistakable indications that Japan won’t see price declines once more.

“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.

Ending price declines has been one of the government’s top policy aims ever since 2001, when Japan was declared to be in a condition of deflation. The emphasis has resulted in years of significant fiscal spending to support the economy and has maintained pressure on the central bank to continue its ultra-loose monetary policy.

(Adapted from Business-standard.com)

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