Japan is making progress toward completely overcoming deflation as "positive developments" not seen before in the economy are emerging to support this view, the government said Tuesday.
A policy report analyzing the state of the economy emphasized the importance of sustained wage growth in establishing the foundation for Japan to officially declare an end to deflation, characterized by continuously falling prices, at a time when the Bank of Japan is widely expected to transition away from years of massive monetary stimulus.
The government highlighted several positive signs, including a proactive stance among Japanese firms in passing on higher costs by raising prices, heightened inflation expectations among households and businesses, and strengthening demand, as evidenced by a narrowing output gap.
"A golden opportunity has come to end our fight, which has continued for a quarter century, to depart from deflation," the report released by the Cabinet Office said.
"We have to determine if Japan will slip back into deflation by examining economic and price developments from various angles, particularly pay hikes," it added.
Annual "shunto" wage negotiations between labor unions and management will shift into full gear toward March after last year saw the fastest pace of pay hikes in three decades.
The Cabinet Office said the country is still "halfway" through in terms of realizing nominal wage growth outpacing inflation. The country's wages have been falling for nearly two years when adjusted for inflation.
The government has maintained that Japan is not in a state of deflation but has yet to officially declare its end.
After higher import costs pushed up the nation's inflation, which has consistently remained above the BOJ's 2 percent target for well over a year, Japan has entered a "different phase," the report said.
It noted price hikes are broadening in the services sector, a positive development in Japan's fight against deflation, given that service providers tend to adjust prices slowly to reflect labor costs.
The report came as the BOJ grows more confident about the possibility of its inflation target being achieved in a stable and sustainable manner, accompanied by wage growth.
The International Monetary Fund last week urged the BOJ to consider winding down its monetary easing and gradually raising interest rates amid market expectations that the central bank will scrap its negative rate policy this spring, at the earliest.
