Japan is set to declare an end to long-term deflation, according to Economy Minister Ryosei Akazawa. This announcement may impact the timing of the Bank of Japan’s next interest rate increase, as inflation has remained above the BOJ’s 2% target for almost three years.
Akazawa noted that all four key indicators for deflation—consumer prices, GDP deflator, unit labour costs, and the output gap—are now positive. The output gap turned positive in the fourth quarter of last year for the first time in six quarters, suggesting demand is exceeding the economy’s capacity.
End Of Ultra Loose Monetary Policy
The BOJ ended its ultra-loose monetary policy in January, raising interest rates to 0.5%. The government’s cautious approach in officially declaring the end of deflation may reduce the need for more fiscal stimulus but could also be beneficial politically ahead of upcoming elections.
The Japanese yen is strengthening, now below 148.00, while the USD/JPY rate is around 147.50.
With Japan preparing to officially declare that deflation has ended, attention will shift towards how this shapes monetary policy decisions. Inflation has consistently exceeded the Bank of Japan’s 2% target, creating expectations for another increase in borrowing costs. Whether or not this leads to swift action depends largely on how policymakers interpret the data.
Akazawa’s observation that key indicators are all pointing upwards reinforces expectations that the BOJ may continue adjusting rates. Positive readings in consumer prices, the GDP deflator, unit labour costs, and the output gap all indicate that the economy has moved beyond its deflationary period. The output gap, which turned positive in the final months of last year, suggests demand is pushing against supply capacity—a condition that often precedes further rate hikes.
Market And Political Considerations
Since the BOJ abandoned its ultra-loose policy stance in January, the shift away from negative interest rates has started altering market expectations. The benchmark rate now sits at 0.5%, and further hikes could follow if inflationary pressures persist. That said, there are political factors at play. The government’s measured approach to formally acknowledging the end of deflation may be an attempt to manage both economic stability and electoral prospects. Reducing reliance on fiscal stimulus helps contain budgetary pressures, but easing off too quickly could create uncertainty in financial markets.
Meanwhile, the yen continues to strengthen. Dropping below 148.00 against the US dollar, the currency has gained ground with USD/JPY trading near 147.50. A stronger yen typically exerts downward pressure on import-driven inflation, which could, in turn, influence future rate discussions.
With these dynamics unfolding, market participants should remain highly attentive to BOJ statements and upcoming data releases.
