The Japanese government expects a key gauge of national price trends to rise for the first time in 16 years in the next fiscal year, a person familiar with the matter said Thursday, in a sign of confidence that a recent economic recovery is helping to bring the country out of nearly two decades of deflation.
Japan’s gross domestic product deflator, a broad measure of price trends that is released along with economic growth figures, has been negative since the fiscal year that ended in March 1998. That deflationary trend, intertwined with sluggish domestic demand, is a major cause of the years of weak growth that economists refer to as Japan’s “lost decade”.
The Cabinet Office, in its latest economic report to be released in the coming days, expects the GDP deflator to rise in the fiscal year that begins in April 2013, the person told Dow Jones Newswires, without giving a specific forecast.
It would mark the first increase since a 0.9 percent rise in fiscal 1997. Most economists attribute the gain in that year to a sales tax hike, and discounting it would mean the deflator has fallen every year since a 0.3 percent rise in fiscal 1993.
The government expects Japan’s economy to grow at a real-or inflation-adjusted-rate of 1.7 percent and a nominal rate of 1.9 percent in fiscal 2013, the person said. The GDP deflator is by definition positive when the nominal growth rate exceeds the real growth rate.
The government and many private sector economists expect the measure to be negative in this fiscal year through March 2013.
Toshihiro Nagahama, chief economist at Dai-Ichi Life Research Institute, said he finds the forecast for fiscal 2013 too rosy given continued high prices of imported energy and food, which he said put downward pressure on the deflator.
“Can prices really rise that much at a time when wages are falling?” he added.
Eradicating deflation and strengthening growth are among the top priorities of the Japanese government as it looks to tackle a public debt load that stands at over 200 percent of annual economic output.
Deflation makes fiscal reform more difficult as it damps growth by discouraging consumers and companies from spending or investing and fuels export-hurting rises in the yen.
But the expected rise in the deflator might not convince Japanese politicians that deflation, while moderating, is gone. Without clear and sustained signs of improvement in the deflator and separate consumer price indexes, they may continue to pressure the Bank of Japan to pump more cash into the markets in a bid to generate price increases. -By Takashi Nakamichi