As wages and prices begin to show indications of improvement, Japan may be on the verge of entering a new stage in the long-term battle it has been waging against deflation. The government of the country expressed its optimism about the prolonged stagnation coming to an end.
The Bank of Japan has observed a shift in corporate pricing and wage practices, which may pave the way for a gradual reduction in monetary stimuli.
According to the government's economic report, there is a window of opportunity to escape from the deflationary crisis caused by rising prices, rising wages, and a dwindling public belief that prices will eventually come down.
The report does not claim that Japan has totally eliminated the risk of deflation because the pace of increase in service costs is still very low. Economists claim that we should pay close attention to the trends of inflation in the services sector as these trends more closely represent domestic demand and wages.
The government's priorities have clearly shifted as evidenced by recent developments about deflationary risks. Inflationary concerns have increased as a result of rising commodity prices and tightening labor market conditions.
Core inflation in Japan reached a new all-time high in 40 years, totaling 4.2% in January, and remained above the Bank of Japan's target of 2% for 16 consecutive months all the way up to July. Companies are also offering salaries that are higher than they have been in the past 30 years. This supports arguments that the central bank may backtrack on long-term monetary easing.
Overcoming the developing deflationary mentality in society and industry is a top priority for the central bank, and it is working closely with the government to achieve stable wage increases.
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