TOKYO (Reuters) – Japan has cleared the key threshold for the government to officially declare an end to long-term price deflation, economy minister Ryosei Akazawa said on Friday.
The remark highlights the government’s optimism over the economic outlook, which could affect the timing of the Bank of Japan’s next interest rate hike.
While inflation has remained above the central bank’s 2% target for nearly three years, the government has yet to officially declare an end to Japan’s “deflation,” which it defines as more a prolonged period of economic stagnation where slow wage growth keeps consumption subdued.
“All four major indicators we use to determine whether Japan is out of deflation have turned positive,” Akazawa told a news conference, pointing to recent data showing Japan’s output gap turned positive in the final quarter of last year.
“We hope the BOJ communicates closely with the government, and continues to guide policy appropriately to sustainably achieve its 2% inflation target,” he said.
A government estimate released on Tuesday showed Japan’s output gap in the October-December period turned positive for the first time in six quarters, meaning actual output exceeded the economy’s full capacity due to solid demand.
The three other indicators the government looks at in judging whether Japan has completely exited deflation are the consumer price index, GDP deflator and unit labour costs.
The BOJ has exited a decade-long, massive stimulus last year and raised interest rates to 0.5% in January on the view Japan was progressing towards durably hitting its 2% inflation target.
The government, for its part, has been cautious in declaring a complete end to deflation, as doing so could leave it with less justification to keep ramping up fiscal stimulus.
Declaring an end to deflation, however, could allow the administration to win political scores ahead of an upper house election scheduled to be held in July, some analysts say.
(Reporting by Yoshifumi Takemoto, writing by Leika Kihara; Editing by Sam Holmes)
