Japan is getting ready to formally declare an finish to long-term deflation

Japan is preparing to officially declare an end to long-term deflation, according to Economy Minister Ryosei Akazawa. This marks a significant shift in the government’s economic outlook and could influence the timing of the Bank of Japan’s next interest rate hike. While inflation has stayed above the BOJ’s 2% target for nearly three years, the government had not previously made an official declaration, as it considers deflation to be a broader issue linked to weak wage growth and subdued consumption.

Akazawa stated that all four key indicators used to assess deflation:

1. consumer prices,
2. GDP deflator,
3. unit labor costs,
4. and the output gap

have turned positive. Notably, Japan’s output gap turned positive in the fourth quarter of last year for the first time in six quarters, indicating that demand is now exceeding the economy’s full capacity. He emphasized the importance of continued coordination between the BOJ and the government to ensure inflation remains sustainably above 2%.

While the BOJ ended its decade-long ultra-loose monetary policy and raised interest rates to 0.5% in January, the government has been cautious in officially declaring the end of deflation. Doing so could reduce justification for further fiscal stimulus but might also serve as a political advantage for the administration ahead of Japan’s upper house elections in July.