According to reports, Japan appears to have reached a turning point in its 25-year struggle against deflation, with indications of expanding price and wage increases. The government's statement underscores its belief that the economy is approaching the conclusion of an extended period of stagnation.

This positive perspective aligns with the Bank of Japan (BOJ)'s stance, which has previously stated that shifts in corporate price- and wage-setting behavior were underway. This alteration in behavior, as per the BOJ, could lay the groundwork for gradually scaling back the substantial fiscal and monetary support that the country has been relying on.

"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.

As reported, the assessment fell short of asserting that Japan has completely eliminated the risk of deflation resurgence, as it pointed out a "still moderate pace" in the growth of services prices.

The report emphasized the significance of examining services prices when gauging inflation trends. It explained that services prices offer a clearer reflection of domestic demand and wage dynamics compared to the pricing of goods.

In the preceding year's report, the government indicated that inflation remained modest, except for a small selection of food and energy-related products.

This shift in the evaluation of deflation risks highlights the government's evolving priorities. Escalating commodity expenses and a tightening labor market have propelled inflation and intensified public concerns about elevated living costs.

In January, Japan's core inflation reached a 40-year peak at 4.2%, and by July, it had remained above the Bank of Japan's (BOJ) 2% target for a consecutive 16 months. This has been facilitated by more businesses passing on the heightened costs of raw materials to consumers.

This year has witnessed companies offering their most substantial pay increases in three decades, a development that has further strengthened the case for a departure from years of ultra-loose monetary policy.

Nevertheless, the government refrained from officially declaring the end of deflation, contending that such an assertion necessitates not only underlying price growth but also clear indications that Japan will not revert to periods of price declines.

The report stressed the importance of eliminating the entrenched deflationary mindset among households and companies. It underscored the need for the government and the BOJ to collaborate closely to achieve sustainable wage growth.

Since declaring Japan to be in a state of deflation in 2001, the government has consistently placed ending price declines among its top policy priorities. This focus has translated into years of substantial fiscal expenditure aimed at shoring up the economy, exerting continual pressure on the central bank to sustain ultra-loose monetary policies.

Image source: Reuters