Tokyo: Japan has met the key conditions necessary for the government to officially declare an end to prolonged deflation, Economy Minister Ryosei Akazawa said on Friday. His statement underscores growing confidence in the country’s economic trajectory and could influence the Bank of Japan’s (BOJ) decision on future interest rate hikes.
Despite inflation remaining above the central bank’s 2% target for nearly three years, the government has yet to formally announce the end of Japan’s deflationary phase. Authorities define deflation not just as a period of falling prices but as an extended economic stagnation marked by sluggish wage growth and weak consumer spending.
“All four major indicators we use to determine whether Japan is out of deflation have turned positive,” Akazawa stated at a press conference, referencing recent data that showed Japan’s output gap had turned positive in the final quarter of 2024.
“We hope the BOJ communicates closely with the government and continues to guide policy appropriately to sustainably achieve its 2% inflation target,” he added.
A government estimate released earlier this week revealed that Japan’s output gap—measuring the difference between actual output and the economy’s full capacity—turned positive for the first time in six quarters, indicating robust demand.
In addition to the output gap, the government assesses three other key indicators to confirm a decisive exit from deflation: the consumer price index, GDP deflator, and unit labor costs.
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The BOJ has already taken steps toward policy normalization, exiting its decade-long ultra-loose monetary stance and raising interest rates to 0.5% in January, signaling confidence in Japan’s ability to sustain its inflation target.
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However, the government has been cautious about making an official declaration, as doing so could limit its ability to justify ongoing fiscal stimulus measures. Some analysts suggest that formally announcing the end of deflation could also provide political leverage for the administration ahead of the upper house election set for July.
