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Deflation is easing, government claims

Kyodo

The economy is on the verge of emerging from nearly two decades of deflation as it has picked up since the beginning of the year, a government report said Tuesday, emphasizing positive aspects of Prime Minister Shinzo Abe’s “Abenomics” policies.

The economy, which has been trapped in a prolonged period of deflation, “has shown signs of turning around,” said the white paper on the economy and finances for fiscal 2013 released by the Cabinet Office. It added that “consumer preference for lower-priced products has been waning.”

Deflation pushed down real gross domestic product by around ¥8.5 trillion for three years from fiscal 2009, as an upturn in real interest rates made companies and households reluctant to take out loans to boost investment, the report said.

Real interest rates — nominal interest rates minus inflation — rise when prices are falling, meaning that real debt burdens increase and borrowing costs become higher.

But the pace of decline in consumer prices, excluding fresh food and energy, has been slowing in recent months, as the pledge by Abe’s administration and the Bank of Japan to conquer deflation has bolstered inflation expectations, the report said.

The depreciation of the yen, triggered by the central bank’s drastic monetary easing policy, has also driven up prices of imported products such as food and energy, helping prevent deflation from getting worse and lowering real interest rates, it said.

May’s consumer prices were flat compared with a year earlier, leaving negative territory for the first time in seven months, the government said late last month.

The report, meanwhile, said fiscal rehabilitation is an “urgent issue” and the two planned sales tax hikes will have a profound effect on lifting tax revenues, suggesting the government’s eagerness to go ahead with next April’s planned consumption tax hike when the rate will rise to 8 percent.

Sales tax hikes in Europe have “not necessarily impeded economic growth” in the region, the report added, indicating Abe’s administration believes Japan’s economy is unlikely to face a downturn even if the planned hike is implemented.

Japan has been urged by global economic organizations such as the International Monetary Fund to double its current 5 percent consumption tax in two stages by 2015 in a bid to restore its fiscal health, the worst among developed countries.

Some lawmakers and government officials, however, have called on Abe to put off the tax hike, arguing it is expected to weigh on consumer spending, which in turn may harm the broader economy.

Abe, whose ruling coalition scored a decisive victory in Sunday’s House of Councilors election, has said his government will make a final judgment on the tax issue in the fall after closely monitoring economic data for the three months through June.

Legislation enacted last August stipulates that the government will seek to accomplish nominal economic growth of around 3 percent and real growth of about 2 percent, as a nonbinding target for the sales tax hike.

The economy is estimated to have grown at an annualized rate of around 3 percent in inflation-adjusted terms in this year’s second quarter, from April to June, surpassing the growth target, a survey of economists conducted by Kyodo News showed last week.