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Japan sets out to fight deflation

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by Kay Mitchell

There have been fears that the return of deflation within the world’s second largest economy could stall growth.

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.

Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s in which the economy struggled with falling prices.

The Bank of Japan’s Governor, Masaaki Shirakawa, today said he was “serious” about beating deflation but added it would be a slow process.

The country’s finance minister, Naoto Kan, set a target of price growth of 1% but put pressure on the Bank for more action to support the fragile economy.

However, the Bank has little room to cut interest rates to boost growth since they are already just above a range of zero.

Furthermore, according to analysts, there is little room for further quantitative easing (a way of injecting money into the economy) since the scheme failed in beating deflation in the past.

Consumer prices in Japan fell by 1.2% in December – the largest fall since the current consumer price index began forty years ago.

However, despite the worry of deflation, the Japanese economy grew at a better than expected 1.1% in the last three months of 2009, growing at an annualised pace of 4.6%.

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News posted: February 16, 2010

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