Speculation is mounting that Japan is ready to declare an official end to its era of deflation.

Japanese Economy Minister, Toshimitsu Motegi, said recently that there is no change to the government’s stance of looking at a range of economic indicators, including consumer prices and the gross domestic product deflator, to determine whether it can declare an end to deflation. But with signs that the Japanese economy is gaining momentum, that declaration could come sooner rather than later.

The first issue to consider is how the Japanese government are defining deflation. The true definition of deflation is the contraction of money and credit in an economy. Under that definition, Japan has been out of deflation since at least 2004, with our Money & Credit Index (MACI) showing positive growth, currently at an annual rate of 1.7%.

Most people, though, think of deflation as a contraction in the consumer price index (CPI). In Japan, CPI has been showing annual growth again since October 2016, having experienced 16 dips into negative territory since the Japanese stock market bubble burst in 1989.

The gross domestic product (GDP) deflator is a metric comparing the level of nominal GDP to real GDP. It essentially calculates how much of GDP is due to rising prices, and is considered by some to be superior to CPI because it measures price changes for the entire economy rather than just the basket of goods that CPI represents. The Japanese GDP deflator is currently at –0.4%.

The Japanese government, it seems, is content to use a broad definition of deflation, perhaps acknowledging that, to a large degree, deflation can be very much a mindset.

This leads us on the second issue to consider, which is, “Will a declaration that deflation has ended mean anything at all?” Readers who have been to Japan will know that it is a country like no other. A unique culture, steeped in tradition and extremely formalized – it is no wonder that the government wants to make an official declaration. Perhaps they think that, by making the announcement, people will all of a sudden realize that, yes, times are better and alter their behavior to become more optimistic.

But Japanese people are already more optimistic. We know this by looking at the trend of social mood, as measured by the bellwether sociometer, the stock market. The Nikkei 225 index bottomed in 2008 and is up over 220% since then, rising over 50% just since summer 2016. The broader TOPIX index is up over 150% from its low in 2012. A positive trending social mood, however, doesn’t have to translate into rising consumer prices. In fact, sometimes social mood can trend positive as consumer prices decline. There have been many occasions in history when economies grew whilst, at the same time, prices declined.

Nevertheless, in Japan, there is growing evidence that a faster pace of consumer price rises is building.

The chart above shows the so-called “breakeven rate” between the yield on a nominal 10-year Japanese government bond and the yield of a bond which is linked to the annual CPI rate. It therefore represents an expectations measure of future consumer price movements. The rate bottomed in February 2016 and since then has made two reaction-lows, each one higher than the previous. These conditions are necessary for an uptrend to be defined. Another higher high, above the December 2016 high of 0.62% would make it more certain that expectations of rising consumer prices were growing.

Whilst the Japanese government mull over whether the economy is really out of deflation, it seems to us that there is already clear evidence that it ended some time ago.

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