The Japanese government highlighted progress toward stamping out deflation after battling it for a quarter century, and urged close cooperation with the Bank of Japan in its latest annual white paper on the economy.
(Bloomberg) — The Japanese government highlighted progress toward stamping out deflation after battling it for a quarter century, and urged close cooperation with the Bank of Japan in its latest annual white paper on the economy.
The Cabinet Office subtitled this year’s paper “inflation, wages getting into motion,” mentioning inflation for the first time in around 50 years.
“We shouldn’t overlook the fact that a chance to end deflation is approaching,” the Cabinet Office said in the paper released Tuesday. “The government needs to closely coordinate with the BOJ and navigate the economy by checking the macro economic environment carefully.”
Economists are paying close attention to when and if Prime Minister Fumio Kishida will declare the official end of deflation, given its potential implications for monetary policy. If the declaration is made, it will likely boost market speculation over normalization, as it makes it easier for BOJ Governor Kazuo Ueda to move away from the central bank’s ultra-easy stance.
The government has said that deflation will have ended when prices are no longer susceptible to continued declines. While Japan’s inflation has stayed well above BOJ’s 2% target this year, the white paper said the risk of deflation coming back can’t be ruled out yet.
The report has occasionally left a strong impression on the Japanese public, especially in 1956 when it said that the nation was no longer in the postwar period.
Japan’s economy must recover a virtuous cycle between wage growth and inflation, where businesses pass labor costs onto their products so they can increase pay, the paper said. That’s true especially for the service sector, it added.
Service prices jumped by the most in three decades last month, and in Tokyo it also accelerated to the fastest pace since 1994 in August, excluding periods when the sales tax was raised. The Cabinet Office said service price items show a mixture of strength and weakness.
The government has said there are four key indicators to watch to gauge the state of deflation. The consumer price index, GDP deflator, output gap and unit labor cost. All of them have turned or estimated to have turned positive.
Calling victory over deflation will also bring market focus to the 2013 joint statement between the government and the BOJ. That was a key reason why then BOJ Governor Haruhiko Kuroda launched his shock-and-awe stimulus bazooka strategy, and stuck with the approach for a decade.
The title of the statement says it’s for “overcoming deflation and achieving sustainable economic growth,” suggesting the need for revision once deflation is over.
Ueda and Kishida agreed to leave the joint statement unchanged on April 10, the first business day after the governor took the central bank’s helm. Ueda said progress has been made for beating deflation and they must continue with efforts to end it.
The BOJ adjusted its yield curve control program last month to prepare for upside inflation risks, while denying it was an unwinding of stimulus. When the bank normalizes policy, close communication with the government is very likely required after past exits were widely criticized as too early.
“Regarding the conduct of macro economic policy, we must be absolutely certain we aren’t ruining the green shoots emerging toward overcoming deflation,” the paper said.
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