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Japan has not yet beaten deflation despite years of persistently rising consumer prices and the largest round of annual wage increases in three decades, the country’s finance minister has warned.
Katsunobu Kato’s blunt assessment in an interview with the Financial Times comes 15 months into the Bank of Japan’s efforts to “normalise” the economy and gradually reintroduce positive interest rates, after a quarter-century-long battle to steer the country away from falling prices.
Kato acknowledged that Japan was experiencing rising prices and that other trends appeared positive, but said the government could only declare victory over deflation when it saw no prospect of sliding back.
“I believe we need to judge carefully whether Japan has broken away from deflation by not only looking at the consumer prices, but looking at underlying prices and background in a comprehensive fashion . . . it is our judgment at present that Japan has not overcome deflation,” Kato said.
The minister’s comments echo some economists’ fears that, while prices are rising, they largely represent the “wrong” type of inflation: driven by a weak yen and high commodity costs rather than a virtuous cycle of rising wages and consumer demand.
Headline inflation has remained above the BoJ’s target of 2 per cent for 35 straight months, and consumer prices excluding fresh food rose 3 per cent in February from a year earlier.
Last Friday, the Japanese Trade Union Confederation, which claims a membership of 7mn workers, said negotiations had resulted in average wage gains of 5.46 per cent, which it said was the highest pay bump in 33 years.
But wage growth is stagnant in real terms, consumer confidence has remained soft and, according to the research group Teikoku Databank, companies in February were passing a smaller proportion of their increased costs on to consumers than they were last July.
During the deflationary period, said Kato, there was no movement in prices, wages or interest rates — a combination that suppressed economic growth and prevented the country from realising its potential.
“It was a very sluggish situation,” Kato said. “However, things are now changing. We are now seeing prices rising, wages rising and in terms of monetary policies, the BoJ is now looking into what the optimal monetary policy stance will be for Japan. So we are now seeing signs of change and normalisation.”
Kato spoke to the FT shortly after the BoJ opted to leave the short term policy rate on hold last week because of the huge uncertainties created by US President Donald Trump’s tariff threats and the rising risks to the global economic picture.
The BoJ’s normalisation process involved ending negative rates in early 2024, followed by a small rise in July that year. In January 2025, the BoJ lifted rates to 0.5 per cent — the highest level in 17 years. Many economists predict at least one more rise this year.
The process of transition into a normal economy, said Kato, depended on ensuring that wage increases outpaced price increases over the long term.
He said it was encouraging that larger companies were raising wages, but the real challenge was to ensure that Japan’s small and medium-sized companies were able to pass rising labour and input costs on to customers.
Stefan Angrick, Japan economist at Moody’s Analytics, said that while the level of consumer price inflation seemed to rule out a return to deflation, Kato’s comments reflected the fact that Japan did not yet have the kind of inflation it wanted.
“And it’s hard to feel very confident that it will,” said Angrick.
The supply shock would eventually fade, he added, and then only stronger domestic demand could keep inflation on target.
“But domestic demand is quite weak. Consumer spending has been flat for the past three years. Capex spending is treading water. Labour markets aren’t quite as tight as they seem,” said Angrick, who expects inflation to drop below 2 per cent by 2026.
