Japan struggles with deflation despite rising consumer prices

Japan’s finance minister, Katsunobu Kato, has stated that the country has not yet overcome deflation. This comes despite higher consumer prices and significant wage increases. In his interview with the Financial Times, Kato emphasized the need for a more comprehensive assessment before declaring victory over deflation. He noted that while consumer prices have been rising, this inflation is largely driven by external factors, such as a weak yen and high commodity prices. The underlying economic conditions do not yet show a sustainable cycle of rising wages and strong consumer demand. Inflation in Japan has stayed above the Bank of Japan’s 2 percent target for 35 months. In February, prices, excluding fresh food, increased by 3 percent from a year earlier. The Japanese Trade Union Confederation reported a significant wage increase of 5.46 percent, the highest in 33 years, but real wage growth remains stagnant, and consumer confidence is low. Kato explained that Japan's economy had previously been stagnant, with no changes in prices, wages, or interest rates. However, he believes recent trends signal a change, with rising prices and wages, along with the Bank of Japan's shift towards normalizing monetary policy. The Bank of Japan recently kept interest rates unchanged due to uncertainty from global economic risks. Following a series of adjustments, rates were raised to 0.5 percent in January 2025, the highest in 17 years, with expectations for further increases. Kato stressed that for the economy to improve, wage increases must outpace price rises. He highlighted the importance of small and medium-sized companies being able to pass on rising costs to customers. Economists, including Stefan Angrick from Moody’s Analytics, agree that while deflation seems unlikely, the current inflation is not the type Japan needs. Domestic demand remains weak, which could lead to a decline in inflation below 2 percent by 2026.