TOKYO- Japan’s government is considering declaring an end to deflation in the wake of rising prices, Kyodo news agency reported, citing sources with knowledge of the matter.
The government will make a decision after determining whether annual labor-management wage talks due March 13 will turn out strong enough to offset price hikes and also consider the outlook on price trends.
If realized, it will mean Japan would break free from deflation that put a drag on economic activity for well over two decades, the sources said.
The government acknowledged that Japan’s economy was in deflation for the first time in 2001, with the nation struggling for much of the past two decades to break a vicious cycle of lower corporate profits, tepid wages and weak private consumption.
In judging an end to deflation, the government would scrutinizes a broad range of indicators, such as consumer prices, unit labor costs, output gap and GDP deflator, Kyodo said, citing the sources.
Japan unexpectedly slipped into a recession at the end of last year, losing its title as the world’s third-biggest economy to Germany and raising doubts about when the central bank would begin to exit its decade-long ultra-loose monetary policy.
Some analysts are warning of another contraction in the current quarter as weak demand in China, sluggish consumption and production halts all point to a challenging path to an economic recovery.
Japan’s gross domestic product (GDP) fell an annualized 0.4 in the October-December period after a 3.3 slump in the previous quarter, government data showed, confounding market forecasts for a 1.4 increase.
Two consecutive quarters of contraction are typically considered the definition of a technical recession.
While many analysts still expect the Bank of Japan to phase out its massive monetary stimulus this year, the weak data may cast doubt on its forecast that rising wages will underpin consumption and keep inflation durably around its 2 target.
Japan’s nominal GDP stood at $4.21 trillion in 2023, falling below $4.46 trillion for Germany to rank as the world’s fourth largest economy, the data showed.
Private consumption, which makes up more than half of economic activity, fell 0.2, versus market forecasts for a 0.1 gain, as rising living costs and warm weather discouraged households from dining out and buying winter clothes.
Capital expenditure, another key private-sector growth engine, fell 0.1, compared with forecasts of a 0.3 gain.
Both consumption and capital expenditure shrank for the third straight quarter.
Big companies expect to increase capital expenditure by hefty 13.5 in the year ending in March, a quarterly survey showed. But analysts point to a delay in actual investment due to rising raw material costs and labour shortages.
The most recent machinery orders data, regarded as a leading indicator of capital spending, showed a contraction in November and cast doubt on the BOJ’s view that robust investment will underpin the economy.
External demand, or exports minus imports, contributed 0.2 percentage point to GDP as exports rose 2.6 from the previous quarter. -Reuters