Japan sees ‘golden opportunity’ as it edges closer to ending deflation

A policy report analysing the state of the economy emphasised sustained wage growth in establishing the foundation for Japan to end deflation

The government has maintained that Japan is not in a state of deflation, but has yet to officially declare its end

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Pedestrians walk in Shinjuku district of Tokyo. The government has maintained that Japan is not in a state of deflation, but has yet to officially declare its end. Photo: AFP

Published: 7:32pm, 13 Feb 2024

Japan is making progress towards completely overcoming deflation as “positive developments” not seen before in the economy are emerging to support this view, the government said on Tuesday.

A policy report analysing the state of the economy emphasised the importance of sustained wage growth in establishing the foundation for Japan to officially declare an end to deflation, characterised by continuously falling prices, at a time when the Bank of Japan is widely expected to transition away from years of massive monetary stimulus.

The government highlighted several positive signs, including a proactive stance among Japanese firms in passing on higher costs by raising prices, heightened inflation expectations among households and businesses, and strengthening demand, as evidenced by a narrowing output gap.

A passer-by walks past a pharmacy in Tokyo. The report came as the BOJ grows more confident about the possibility of its inflation target being achieved in a stable and sustainable manner, accompanied by wage growth. Photo: EPA-EFE

“A golden opportunity has come to end our fight, which has continued for a quarter century, to depart from deflation,” the report released by the cabinet office said.

“We have to determine if Japan will slip back into deflation by examining economic and price developments from various angles, particularly pay hikes,” it added.

Annual shunto wage negotiations between labour unions and management will shift into full gear towards March after last year saw the fastest pace of pay hikes in three decades.

The cabinet office said the country is still “halfway” through in terms of realising nominal wage growth outpacing inflation. The country’s wages have been falling for nearly two years when adjusted for inflation.

The government has maintained that Japan is not in a state of deflation, but has yet to officially declare its end.