Japan is contemplating calling an end to deflation as prices begin to rise, Kyodo News reported, in what would mark a significant shift for the world’s fourth-largest economy after decades of economic stagnation that have left a lasting impact on workers and investors.
The weekend report, citing sources with knowledge of the matter, highlights growing market bets that the Bank of Japan (BOJ) will soon exit its ultraeasy policy settings.
However, it wasn’t clear from the Kyodo report if the government would officially declare an end to deflation. In the last few years, the government has maintained that Japan was no longer in deflation, but it has stopped short of declaring a complete victory over falling prices.
A formal declaration would draw a line under nearly two decades of falling prices and economic stagnation that followed the collapse of its “bubble era” boom that stretched from 1986 to 1991.
Last week, the Tokyo Nikkei benchmark soared past the record high set during the heady days of the bubble economy over three decades ago.
Chief Cabinet Secretary Yoshimasa Hayashi told a news conference that Japan has not reached the stage yet where it can call a complete end to deflation, shrugging off the Kyodo report.
With inflation having exceeded the BOJ’s 2% target for well over a year, many market players expect the central bank to exit negative interest rates in the coming months in what would be a landmark move away from years of ultraloose monetary policy.
A Reuters poll of economists forecasts the BOJ will end its negative interest rate policy, which has been in place since 2016, by next month.
“It may suggest that the government and the BOJ may be coordinating with each other to let the markets factor in the prospects for declaring an end to deflation in the future and terminating negative interest rates,” said Atsushi Takeda, chief economist at Itochu Economic Research Institute, referring to the planned government announcement.
Prime Minister Fumio Kishida or cabinet ministers may make the announcement at a government panel meeting, news conference or in a monthly economic report rather than at a formal venue like the cabinet meeting, Kyodo reported.
The government will make a decision after determining whether annual labor-management wage talks due March 13 will turn out strong enough to offset price hikes and also consider the outlook on price trends, Kyodo reported.
The government acknowledged that Japan’s economy was in gradual deflation for the first time in 2001, with the nation struggling for much of the period since then to break a vicious cycle of lower corporate profits, tepid wages, and weak private consumption.
The government would scrutinize a broad range of indicators, such as consumer prices, unit labor costs, the output gap and gross domestic product (GDP) deflator, Kyodo said, citing the sources.
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