TOKYO — Four key indicators linked to Japan’s consumer prices have all stayed positive for at least three straight quarters through March, giving hope for the prolonged fight against deflation.
The output gap, which measures how much demand outpaces supply based on gross domestic product data, stood at positive 0.2% for the January-March quarter, Japan’s Cabinet Office reported Tuesday. Plus-side demand normally puts upward pressure on prices, while a negative reading suggests deflationary conditions.
The output gap has remained positive for five consecutive quarters. When the latest data is annualized, demand tops supply by about 1 trillion yen ($9.2 billion).
The output gap for all of fiscal 2017 came to 0.5%, the first annual figure in positive territory since fiscal 2013, which experienced a rush of purchases before the national sales tax was hiked. Fiscal 2017’s margin was also the largest since the 1.5% recorded in fiscal 2007, just before the global financial crisis.
Along with the output gap, the Japanese government monitors three other yardsticks when determining progress against deflation: the consumer price index, unit labor cost and the GDP deflator, which gives a comprehensive picture of price movements. It is the first time in more than 25 years that all four metrics simultaneously maintained plus readings for three uninterrupted quarters.
The Council on Economic and Fiscal Policy, an advisory body chaired by Prime Minister Shinzo Abe, declared last November that Japan had entered a new phase toward a recovery from deflation. Even now, the Cabinet Office says conditions are still on course toward improvement.
Bank of Japan Gov. Haruhiko Kuroda has also chimed in with his positive outlook on the situation. “The deflation defined by sustained declines in prices is phasing out,” he said in March.
Still, officials are largely stopping short of declaring victory against deflation. The comprehensive consumer price index rose 1.3% in the January-March quarter, but the core CPI that excludes volatile fresh food and energy prices inched up only 0.5% in the same period.
The cost of importing crude oil has jumped recently, which could prompt a wave of price increases. If those trends weigh on consumption, that could put the reflationary goals further out of sight.
“If the yen appreciation advances, [the CPI] may fall once again,” adds a Cabinet Office source.