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Sunday 04th of October 2009
September 29, 2009    

Long-term deflation fears as Japan’s consumer prices fall in August

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by Kay Murchie

There are fears of long-term deflation in the world’s second largest economy after official figures revealed August core consumer prices fell at a record rate of 2.4% compared with a year ago.

It was the fourth consecutive month of record falls and the figures have raised fears that the economy could see a long period of deflation. Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s.

The record fall for the month was primarily due to lower petrol and energy costs as well as a slump in domestic demand.

The risk of prolonged deflation comes in spite of a pick-up within the economy, which experienced positive growth in quarter two, exiting a year-long recession.

Susumu Kato, chief economist at Calyon Securities, comments: “Reflecting stagnant retail sales, falls in prices are spreading more broadly than we had expected.

“There’s a chance that deflation might continue longer than expected,” he added.

Meanwhile, Kyohei Morita, chief Japan economist at Barclays Capital told reporters: “As households’ spending power falls, there’s concern that this deflation will lead to further deflation - in other words, that we’ll enter into a deflationary spiral.”

The Bank of Japan recently forecast deflation would last until the year to March 2011 and is expected to extend its deflation forecast by a further 12 months when it releases its next set of forecasts at the end of next month.

In related news, yesterday the yen hit 88.23 against the dollar today - the highest level since January when the currency hit a 13-year high of 87.10 per dollar.

However, while a strong yen is good news for the economy, it makes Japanese exports less competitive - but means imports are more affordable to Japanese consumers.

Last week, the finance ministry reported that Japanese exports were down for the 11th consecutive month in August due to a slump in demand from the global economy.

The world’s no. 2 economy saw exports tumble 36% in August compared with the same month last year to 4.5 trillion yen (£29.9 billion).

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