Is Japan's 25 year deflation coming to an end?
On August 29th, the Japanese Cabinet Office released its annual economic white paper. The white paper believes that since the spring of 2022, Japan's price and wage increases have expanded, and the 25 year long deflationary war in the Japanese economy is reaching a turning point. The optimistic attitude of the Japanese government towards inflation may affect the monetary policy of the Bank of Japan. The market is closely monitoring when the Bank of Japan's ultra loose policy will be adjusted.
White Paper: Deflation is Coming to an End
The Japanese cabinet has set the subtitle of this year's white paper as "Inflation, Wages Start Taking Action", while the main text mentions "inflation" for the first time in nearly 50 years. In the document, the Japanese Cabinet Office stated, "We should not overlook that the opportunity to end deflation is approaching, and the government needs to closely coordinate with the Bank of Japan to guide the economy by carefully examining the macroeconomic environment."
The white paper suggests that deflation will come to an end when prices no longer easily continue to fall. Although inflation in Japan has exceeded the central bank's target of 2% this year, the white paper suggests that the risk of a resurgence of deflation cannot be ruled out.
The trend of Japanese CPI
The white paper mentions that measuring deflation requires attention to four key indicators: consumer price index, GDP deflator, output gap, and unit labor cost. All of these have either turned positive or are estimated to have turned positive.
Among them, the GDP deflator has risen to a historical high. By observing the changes in the GDP deflator, people can understand the inflation or deflation situation in the economy. When it reaches a historical high, it often means that the overall price level in the economy has also reached a historical high.
The white paper states that the Japanese economy must restore a virtuous cycle between wage growth and inflation, where companies shift labor costs onto products in order to raise wages, especially in the service industry.
The white paper also points out that when determining inflation trends, it is necessary to focus on service prices, as they better reflect domestic demand and wage changes than commodity prices.
The white paper concludes by emphasizing, "In terms of implementing macroeconomic policies, we must absolutely ensure that we will not undermine the seeds of overcoming deflation."
The Bank of Japan is still struggling to turn in the short term
![Is Japan's 25 year deflation coming to an end?](https://a5qu.com/upload/images/44d267f0622701ae506bb2f55c3d1d84.jpg)
Compared to last year's economic report, the Japanese government's rhetoric on inflation has clearly changed. This change in tone also foreshadows a shift in the Japanese government's priorities and creates an environment for gradually withdrawing from loose policies. The changing attitude of Japanese government departments towards inflation may affect the monetary policy of the Bank of Japan.
In January 2013, the Japanese government and the Bank of Japan issued a joint statement to "achieve the 2% inflation target as soon as possible", which became the starting point of Japan's financial easing policy. Subsequently, the then Governor of the Bank of Japan, Toshiko Kuroda, launched an ultra loose monetary policy strategy and persisted for ten years. The title of the statement states that the purpose is to "overcome deflation and achieve sustainable economic growth", implying the need for revision after deflation ends.
On April 10th this year, the current Bank of Japan Governor Kazuo Ueda and Prime Minister Fumio Kishida agreed to maintain the joint statement unchanged. Kazuo Ueda stated that progress has been made in overcoming deflation, and they must continue to work hard to end it.
But as prices and wage levels continue to rise in Japan, the Bank of Japan is facing increasing inflationary pressure. In July, the Bank of Japan adjusted its yield curve control plan to prepare for the risk of upward inflation, but denied that this was an exit from stimulus measures.
If the Bank of Japan wants to make policy adjustments, it is obvious that it will consult with the government first. The market is closely monitoring when and whether Japanese Prime Minister Fumio Kishida will officially announce the end of deflation. If Fumio Kishida makes a statement, it may trigger market speculation about normalization, as it will make it easier for Bank of Japan Governor Kazuo Kishida to change the bank's ultra loose stance.
At the annual meeting of the central bank in Jackson Hole last week, Bank of Japan Governor Watanabe Ueda reiterated the importance of continuing to implement monetary stimulus. He believes that Japan's potential inflation is still below the target of 2%.
According to data from the Ministry of General Affairs of Japan on the 18th, the core CPI in July, excluding fresh food, increased by 3.1% year-on-year for 23 consecutive months, continuing to operate above the Bank of Japan's 2% price target. Among them, the price increase in the service industry reached the highest level in 30 years. At the same time, Japanese companies have offered the highest salaries in 30 years this year, intensifying market expectations for the central bank to launch an ultra loose monetary policy.