Japan appears to have exited 15-year deflationary cycle following overhaul of monetary policy, but risk of it returning cannot be ruled out, particularly if wages fail to rise faster than consumer prices, says economics minister

Cindy Allen

TOKYO , January 21, 2014 (Thomson Reuters Corp.) – Japan appears to have escaped deflation for now, Economics Minister Akira Amari said on Tuesday, but warned that the risk of it returning cannot be ruled out as policy makers continue their efforts to foster sustainable growth.

Amari said it is important that wages rise faster than consumer prices and that he will closely watch annual wage negotiations that will take place this spring.

Tokyo's aggressive fiscal and monetary stimulus over the past year has sparked a recovery in the world's third-largest economy.

However, capital spending and wage rises have been slow to catch-up, leading some analysts to doubt that inflation can reach the Bank of Japan's 2 percent goal.

The minister's comments come as the BOJ begins a two-day meeting where the central bank is likely to keep its massive quantitative easing program unchanged, judging the economy is on track to meeting its 2 percent inflation target.

"As of today, we can say we have escaped deflation. However, the problem is there is no guarantee that we will not return to deflation," Amari told reporters after a cabinet meeting.

"So we are not in deflation, but there is a risk we could return to a deflationary environment."

The BOJ expanded its purchases of government debt and risk assets almost a year ago in an overhaul of its monetary policy to defeat 15 years of mild deflation and reach its inflation target in about two years.

Since then, consumer inflation has climbed above 1 percent, or about half of the BOJ's price stability goal, which has raised hopes that the inflation target can eventually be reached.

However, some members of the BOJ board have said publicly that the two-year timeframe is overly ambitious and should be changed.

Some economists also worry that Japan is relying too much on a weak yen to spur inflation and that once the impact from the currency is stripped out, inflation will be much weaker.

(Editing by Dominic Lau & Shri Navaratnam)

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