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Sunday 22nd of November 2009
November 20, 2009    

Deflation returns to world’s second largest economy

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by Kay Murchie

Naoto Kan, Japan’s deputy prime minister, has today acknowledged that deflation has returned to the world’s no.2 economy for the first time since 2006.

The Cabinet Office said in a statement that “Japan is in a mild deflationary situation”.

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.

Earlier this week, it was revealed that the economy grew by 1.2% in the third quarter confirming that it has officially exited recession.

The rise in Japan’s GDP takes the annual rate of growth to 4.8% and while economists believe there is little chance of the world’s second largest economy returning to recession, overall growth is likely to be sluggish for years.

Meanwhile, the Government’s warning of a deflationary phase comes as the Japanese central bank elected to retain interest rates at 0.1%.

The Cabinet Office acknowledged that falling prices could hurt the recovery of the economy.

Finance Minister Hirohisa Fujii expressed his concern and said: “The recent price falls are not right, and worrisome.”

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