Japanese inflation suffers heavy fall


There are fears that the worlda��s second largest economy could be heading for deflation after figures from the Ministry of Finance revealed that Japan’s core consumer price index (CPI) fell 1.1% in May compared with the same month last year – the most since records began almost forty years ago.

The countrya��s Finance Minister, Kaoru Yosano, said: “We must carefully manage the economy so that it does not collapse further and enter into a deflationary spiral.”

A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Without consumer spending to stimulate growth, economic output falls.

Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s.

According to Richard Jerram, an economist at Macquarie Securities, Japan looks like it is heading for another period of deflation.

The export-dependent economy, which was once seen as relatively unscathed by the global financial crisis, has been hit by a slump in demand for its products overseas, particularly cars and electrical goods. During the first three months of 2009, Japanese exports plummeted by 26%.

Japana��s economy contracted at an annualised pace of 14.2% in the first three months of the year.

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