Japan government contemplates declaring an end to the deflation battle, sources say

The Japanese government is contemplating on officially declaring an end to the prolonged battle against deflation; Kyodo News reported citing sources familiar with the matter.

According to the report, this consideration comes after nearly two decades of the country grappling with moderate price declines.

While Japan has consistently denied being in a state of deflation, dispelling entrenched public perceptions of stagnant prices and wages has proven challenging.

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"The recent bout of inflation, driven mostly by higher import costs, and the prospect of sustainable wage growth is seen as clearing the way for Japan to end its war on deflation," the sources in correspondence with Kyodo News stated.

The government is closely monitoring labour-management wage negotiations and the trajectory of inflation to ascertain whether conditions have matured for a definitive departure from deflationary pressures.

For Japan, entrenched deflationary pressures have perpetuated a detrimental cycle, wherein falling prices have constrained corporate profits and impeded wage growth, subsequently hampering private consumption—a pivotal component of the economy.

Thus, an official declaration will mark the removal of a major growth obstacle for Japan's economy.

Potential avenues for a formal announcement include Prime Minister Fumio Kishida or Cabinet members making a public declaration, or the government issuing a statement in its monthly economic report.

However, government officials indicate that any decision will hinge on economic performance and ultimately lie within the purview of the Prime Minister.

"June will be important," noted one government official, citing upcoming policy measures aimed at bolstering domestic demand, including income and residence tax cuts for Japanese households.

However, there exists caution within the government regarding the timing of declaring an end to deflation, given lingering uncertainties in the price outlook and broader economic landscape.

Despite signs of progress, scepticism persists within certain quarters of the government regarding the necessity and timing of officially ending the deflation narrative.

Some officials assert that maintaining the current stance, which denies Japan being in a state of deflation, remains a priority.

They highlight potential reputational risks should economic conditions deteriorate post-declaration.

The Bank of Japan's aggressive monetary easing measures, in tandem with a joint agreement with the government in 2013 aimed at achieving 2 percent inflation, have been significant efforts to combat deflation.

However, BOJ Chief Kazuo Ueda recently acknowledged Japan's state of inflation, fuelling speculation about potential shifts in monetary policy.

Critical economic indicators, including Japan's closing output gap, indicate a pickup in demand—a positive sign for achieving stable inflation.

Yet, amidst cautious optimism, government officials stress the need for prudence and vigilance, particularly given the unforeseen recessionary episode at the end of 2023.

(With inputs from agencies)