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Monday 28th of June 2010
June 25, 2010    

Japan continues its battle with deflation

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by Kay Murchie

Official figures today revealed Japanese core consumer prices fell 1.2% in May from a year earlier – representing the 15th consecutive monthly decline that the world’s no.2 economy has been in 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.

Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo, commented: “The report showed deflation still persists. Whether the central bank takes additional easing measures depends on how strong the government’s demands will be.”

The Bank of Japan has kept interest rates at 0.1% since December 2008 in a bid to combat deflation and rates are likely to stay at the low level in the longer term, according to experts.

Japan was one of the first major economies to emerge from recession in the second quarter of 2009 – boosted by the country’s dependence on exports.

Growing demand for cars, high tech products and factory parts have driven the recovery.

Official data released earlier this week revealed Japanese exports rose for the sixth consecutive month in May by 32.1% to 5.31 trillion yen, however, this fell short of expectations of a 37% rise.

Meanwhile, another major issue for the Japanese economy is the country’s debt - which at nearly 230% of GDP is the highest of any industrialised nation.

The debt is the result of decades of stimulus spending and low tax receipts.

Japan’s new Prime Minister, Naoto Kan, has warned of tough measures in order to reduce the debt mountain – or risk a Greece-style debt crisis.

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