Japan at 'inflection point' in 25-year battle with deflation, says govt

Japan may be at an inflection point in its 25-year battle with deflation as price and wage rises show signs of broadening, the government said on Tuesday, signalling its conviction the economy was nearing an end to prolonged stagnation.

The optimistic view echoes that of the Bank of Japan (BOJ), which has said corporate price- and wage-setting behaviour was changing, and could pave the way for phasing out the country's massive fiscal and monetary support.

“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.

The report stopped short of saying Japan has fully eradicated the risk of deflation returning, pointing to a “still moderate pace” of increase in services prices.

“In determining the trend of inflation, it’s important to look at services prices” as they reflect domestic demand and wages more vividly than goods prices, the report said. In last year’s report, the government said inflation was modest except for a handful of food and energy-related goods.

The change in tone on deflation risks underscore the government’s shifting priorities, as rising commodity costs and a tightening job market push up inflation and heighten public worries over higher living expenses.