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

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.

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 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.

After higher import costs pushed up the nation’s inflation, which has consistently remained above the BOJ’s 2 per cent target for well over a year, Japan has entered a “different phase”, the report said.

It noted price hikes are broadening in the services sector, a positive development in Japan’s fight against deflation, given that service providers tend to adjust prices slowly to reflect labour costs.

The report came as the BOJ grows more confident