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Friday 28th of May 2010
March 26, 2010    

Japan continues to battle with deflation

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by Kay Murchie

Official figures today revealed Japanese core consumer prices fell 1.2% in February from a year earlier - representing the 12th consecutive monthly decline that the world’s no.2 economy has been in deflation.

The latest figures suggest that ongoing deflationary pressure could ultimately threaten Japan’s fragile economic recovery.

The economy was one of the first to emerge from recession in the second quarter of last year.

The Bank of Japan (BoJ) recently elected to keep interest rates at the low level 0.1% in a bid to fight off deflation.

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 Japanese Government has been putting pressure on the BoJ to further increase the money supply to deal with the problem.

Finance Minister, Naoto Kan, said: “The pace of decline in prices is slowing somewhat, but prices are still falling. More efforts will be needed to escape deflation.”

According to Takeshi Minami at the Norinchukin Research Institute: “There is still long way to go before Japan pulls out of deflation.

“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,” he added.

In related news, this week the finance ministry said Japanese exports surged 45.3% in February to 5.13 trillion yen (£37.3 billion, $56 billion), the fastest year-on-year growth in 30 years.

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