Japan has officially cleared a significant economic threshold, bringing the country closer to an official end to its long-standing deflationary period, Economy Minister Ryosei Akazawa announced on Friday. This development reflects the government’s optimistic view of the nation’s economic recovery and may influence the timing of future interest rate hikes by the Bank of Japan (BOJ).
Although inflation has remained above the central bank’s 2% target for nearly three years, the government had yet to declare an official end to Japan’s deflation. The government defines deflation not merely as falling prices but as a prolonged economic stagnation where slow wage growth curtails consumption.
“All four major indicators we use to assess whether Japan is out of deflation have turned positive,” Akazawa stated at a press conference, highlighting data that shows Japan’s output gap turning positive in the last quarter of 2024.
The output gap, a measure of how much actual output exceeds the economy’s potential capacity, showed that demand had exceeded the economy’s full capacity during the October-December period, the first such occurrence in six quarters.
In addition to the output gap, the government also monitors three other key indicators to assess Japan’s deflation status: the consumer price index, GDP deflator, and unit labor costs. These metrics, alongside the positive output gap, suggest a strong rebound in economic activity.
The BOJ, which ended its decade-long massive stimulus last year, raised interest rates to 0.5% in January, signaling confidence in Japan’s ability to sustain its inflation target of 2%. The central bank’s actions align with the view that the country is on track to achieve durable inflation.
Despite the encouraging signs, the government has exercised caution in formally declaring an end to deflation, as doing so could undermine its rationale for continued fiscal stimulus. However, some analysts suggest that such a declaration could benefit the administration politically, especially ahead of the upper house elections scheduled for July.
In his remarks, Akazawa emphasized the importance of close communication between the BOJ and the government, urging continued policy alignment to achieve sustainable economic growth and maintain inflation at target levels.
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