By Yoshifumi Takemoto and Tetsushi Kajimoto

TOKYO Japan is no longer in deflation but policymakers need to ensure prices do not slide back into contraction, economy minister Yoshitaka Shindo said on Friday, suggesting authorities are still concerned about soggy consumer demand.

Policymakers must closely watch key indicators including the output gap and labour costs before they declare a complete end to deflation, Shindo said.

"Japan's economy is no longer in deflation," Shindo told a group of reporters in an interview. "Japan's economy is making steady progress" towards putting a decisive end to deflation.

Policymakers say the economy is no longer in the deflationary period that started in the late 1990s although they are yet to declare a decisive end to declining prices given current risks around the fragile economic recovery.

Shindo welcomed efforts the government and the central bank have made in pulling Japan's economy, the world's third-largest, out of deflation.

The government and the Bank of Japan issued a joint statement in January 2013, in which the central bank pledged to achieve a 2% inflation target at the earliest possible time while the government vowed to tackle pro growth reform.

Shindo became economy minister in a cabinet reshuffle earlier this month and has been tasked with overseeing a new economic package.

He said Japan must balance the task of reviving the economy with efforts to curb its mammoth debt as policymakers seek to balance a primary budget by the fiscal year ending March 2026.

(Reporting by Tetsushi Kajimoto; Editing by Jacqueline Wong and Sam Holmes)