Japan's consumer prices continue to fall

Posted on Friday, March 26, 2010

Japan has been in deflation for 12 straight months, figures released by the government show.

Prices fell by 1.2% in February from a year earlier, threatening the country's recovery from recession.

Japan's economy has been periodically plagued by deflation since the "lost decade" of the 1990s, which led to years of stagnation.

The prospect that goods will become cheaper in the future makes consumers reluctant to buy today.

This leads to a vicious circle of falling company profits and wages.

Downward trend

The latest figures - where the core consumer price index fell by 1.2% - is not as bad as in previous months.

But the preliminary figures for Tokyo for March showed a steeper decline. The capital is seen as an indicator for nationwide trends.

Eyeing an election in the summer, the government is putting pressure on the Bank of Japan to further increase the money supply to tackle the problem.

"The pace of decline in prices is slowing somewhat, but prices are still falling," said Finance Minister Naoto Kan.

"More efforts will be needed to escape deflation."

Record budget

But the government has little room to spend more to counter deflation.

Its debt is already the largest in the industrialised world and rising.

For this reason, analysts said it could be a long time before prices start rising again in Japan.

"There is still long way to go before Japan pulls out of deflation," said Takeshi Minami at the Norinchukin Research Institute.

"The Bank of Japan has said it will patiently maintain very easy monetary policy. They really need to do so for a very long time for the country to escape deflation."

On Wednesday, parliament passed a record $1 trillion budget, much of it financed by borrowing.

The Japanese economy grew by 0.9% in the final three months of last year, or 3.8% on an annualised basis.

It is vying with China for the title of the world's second-largest economy, behind the US.