Jamie Spencer
Japan has officially met the criteria for ending long-term price deflation, according to Economy Minister Ryosei Akazawa. The announcement underscores the government’s optimism about the economic outlook and could influence the timing of the Bank of Japan’s next interest rate hike.
Government Confirms Economic Shift
While inflation has remained above the central bank’s 2% target for nearly three years, Japan had not officially declared an end to deflation. The government defines deflation as a prolonged period of economic stagnation in which slow wage growth suppresses consumption.
“All four major indicators we use to determine whether Japan is out of deflation have turned positive,” Akazawa said at a news conference, citing recent data showing Japan’s output gap turned positive in the final quarter of last year.
Key Economic Indicators Support Decision
Japan’s output gap, a measure of actual economic output versus potential, became positive in the October-December period for the first time in six quarters. This suggests that solid demand is driving economic activity.
In addition to the output gap, the government also considers three other indicators to assess whether deflation has ended: the consumer price index, GDP deflator, and unit labor costs. All four indicators now signal that deflation is over.
Implications for Monetary and Fiscal Policy
The Bank of Japan ended a decade-long massive stimulus program last year and raised interest rates to 0.5% in January. The positive economic data may increase pressure on the BOJ to proceed with further rate hikes to ensure stable inflation.
At the same time, the government has been cautious in making this declaration, as acknowledging the end of deflation could reduce the justification for additional fiscal stimulus.
Some analysts suggest that officially declaring an end to deflation could serve political interests, especially with an upper house election scheduled for July.
