Japanese Finance Minister Katsunobu Kato has issued a cautionary statement, emphasizing that the country has not yet overcome deflation, despite increasing consumer prices and wage growth. Speaking to the Financial Times, Kato highlighted that Japan’s economic outlook remains uncertain, and the government is not ready to declare the end of deflation.
Deflation Concerns Persist Despite Economic Shifts
Japan has been grappling with chronic deflation since the late 1990s, a period marked by stagnant economic growth and declining prices. While recent inflation trends suggest progress, Kato insists that deflation is not officially over until the economy shows no risk of returning to downward price pressures.
“We need to assess underlying price trends and their background comprehensively,” Kato stated. “Only when we are certain there’s no risk of reverting to deflation can we confidently say we have overcome it.”
Long-Standing Battle with Deflation
Japan’s deflationary struggles began over two decades ago, with economic factors such as an aging population, demand shortages, and a burst asset bubble contributing to prolonged stagnation. According to Bank of Japan (BOJ) Deputy Governor Uchida Shinichi, deflation in Japan has meant near-zero or even negative price changes, causing uncertainty in economic growth.
Over the years, the Japanese government and BOJ have introduced multiple strategies to boost inflation, including aggressive monetary policies. However, the fight against deflation remains a key challenge.
BOJ’s Monetary Policy Adjustments
In March 2024, the BOJ made a historic shift by raising interest rates for the first time in 17 years, departing from the radical monetary easing measures introduced by former Governor Haruhiko Kuroda. Under Kuroda, the BOJ had implemented negative interest rates and extensive asset purchases to stimulate the economy.
With the transition to Governor Kazuo Ueda’s leadership, the central bank adopted a more measured approach. In January 2025, the BOJ raised short-term interest rates to 0.5%, reflecting efforts to stabilize inflation and sustain economic growth.
The “Illusion” of Inflation?
Despite inflation surpassing the BOJ’s 2% target since 2022, Kato warns against misinterpreting the data. Japan’s core Consumer Price Index (CPI) in February 2025 showed a year-on-year increase of 3%, down from 3.2% in January. Food prices have been a major contributor to inflation, along with rising costs in fuel and accommodation.
Government spokesperson Yoshimasa Hayashi acknowledged public concerns, stating, “We aim to protect consumers from excessive price increases while closely monitoring market trends.”
Wage Growth and Economic Turnaround
Rising wages have also been a focal point in Japan’s economic outlook. The nation’s largest trade union, Rengo, successfully negotiated an average wage increase of 5.46% in 2025, up from 5.01% in 2024. While this marks progress, Kato stressed that wage growth must consistently outpace inflation to prevent a deflationary relapse.
“We need sustained wage increases that exceed consumer price growth to ensure long-term economic stability,” Kato explained.
Divided Views on Deflation’s End
While Kato remains cautious, other officials, including Economy Minister Ryosei Akazawa, argue that Japan should declare deflation over. Akazawa pointed to positive shifts in four key economic indicators in late 2024, suggesting that inflationary momentum is strengthening.
However, experts remain skeptical. Stefan Angrick, an economist at Moody’s Analytics, warned that inflation levels may not be sustainable. “Japan’s domestic demand remains weak, and consumer spending is stagnant. If these trends continue, inflation could fall below 2% by 2026,” Angrick stated.
As Japan navigates its economic recovery, policymakers must balance inflation control with long-term growth strategies. The government’s next steps will be crucial in determining whether Japan can finally break free from deflation or if further measures are needed to sustain economic stability.
