Will Japan Declare an End to Deflation?

Here's what EWI's Asian-Pacific Financial Forecast said on Oct. 6:

[Japan] Prime Minster Abe dissolved parliament's lower house last week ahead of a snap election to be held one year ahead of schedule. He appears to be applying the same good judgment he showed when he called a snap election in November 2014, in the early stages of the 2014-2015 bull market. The rising mood of the times should favor the ruling party.

Sure enough, on Oct. 22, Abe's ruling Liberal Democratic Party achieved a resounding win. But, when it comes to deflation, the government is reluctant to declare a victory.

However, Japan's financial authorities are hopeful about the next two years.

Read this excerpt from an Oct. 25 Reuters article:

Japan's government may be able to declare that the economy has made a sustained exit from deflation before it implements a scheduled sales tax hike in October 2019, government officials said. …

"Work is already under way in analyzing when the government can declare an end to deflation," one of the officials said.

The government has held off on declaring a complete end to deflation given the fragile state of the economic recovery and the risk of prices falling again.

The announcement could be made if consumer inflation accelerates to around 1 to 1.5 percent and the gross domestic product (GDP) deflator - another price gauge - is stably above 1 percent, the officials said on condition of anonymity as they were not authorized to speak publicly.

Core consumer prices rose 0.7 percent in August from a year earlier, marking the eight straight month of increases, partly reflecting bright signs of growth in the economy.

But the GDP deflator fell 0.4 percent in April-June from the same period of the previous year, declining for four straight quarters in a row.

Japan has suffered 15 years of grinding deflation since an asset-inflated bubble burst in the late 1990s. Ending deflation has been among Abe's top priorities since he assumed power in 2012.

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