Japan may declare end to deflation before 2019 tax hike: sources

By Izumi Nakagawa and Sumio Ito

TOKYO (Reuters) – Japan’s government may be able to declare that the economy has made a sustained exit from deflation before it implements a scheduled sales tax hike in October 2019, government officials said.

Such an announcement would help Prime Minister Shinzo Abe, who drove his ruling Liberal Democratic Party to victory in Sunday’s election, make the case that his “Abenomics” stimulus policies are working.

“Work is already under way in analyzing when the government can declare an end to deflation,” one of the officials said.

The government has held off on declaring a complete end to deflation given the fragile state of the economic recovery and the risk of prices falling again.

The announcement could be made if consumer inflation accelerates to around 1 to 1.5 percent and the gross domestic product (GDP) deflator – another price gauge – is stably above 1 percent, the officials said on condition of anonymity as they were not authorized to speak publicly.

Core consumer prices rose 0.7 percent in August from a year earlier, marking the eight straight month of increases, partly reflecting bright signs of growth in the economy.

But the GDP deflator fell 0.4 percent in April-June from the same period of the previous year, declining for four straight quarters in a row.

Japan has suffered 15 years of grinding deflation since an asset-inflated bubble burst in the late 1990s. Ending deflation has been among Abe’s top priorities since he assumed power in 2012.

Bank of Japan Governor Haruhiko Kuroda, mandated by Abe to put an end to deflation, has pledged to achieve the bank’s 2 percent inflation target through aggressive monetary easing.

Announcing an end to deflation may help boost private consumption by brightening public sentiment. It would also justify Abe’s plan to proceed with a scheduled sales tax hike to 10 percent from 8 percent in 2019, the officials said.

“It would be desirable to declare an end to deflation before the sales tax hike,” another official said.

Such an announcement wouldn’t prompt the Bank of Japan to dial back its massive monetary stimulus because inflation will still be short of its 2 percent target, the officials said.

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