Japan on Friday urged companies to raise wages on par with price hikes of around 2%, a level the central bank has set as its inflation target, so that the world's third-largest economy can complete its exit from deflation.

The government said in its Annual Report on the Japanese Economy and Public Finance that such raises will prevent the country from falling into stagflation, at a time when the United States, Europe and others are suffering from price surges fanned by Russia's war against Ukraine.

It was the first such paper compiled under Prime Minister Fumio Kishida, who pledges to bring about "new capitalism," characterized by a virtuous cycle of growth and redistribution driven by investment into people.