Page last updated at 10:41 GMT, Tuesday, 16 February 2010

Japan sets inflation goal in fight against deflation

Japanese shoppers
Deflation means consumers tend to postpone major purchases

Japan has reiterated its commitment to beating deflation, with the country's finance minister setting a target for price rises of 1%.

Naoto Kan said the Bank of Japan shared this "policy goal".

The bank's governor Masaaki Shirakawa said he was "serious" about beating deflation, but said it would take time.

The latest figures show consumer prices in Japan fell by 1.2% in December, the biggest drop since the current consumer price index began in 1970.

"I personally would like to see growth of around 1%, or perhaps even a little more," said Mr Kan.

But he said it was up to Japan's central bank to decide how best to achieve this goal.

Deflation fight

Interest rates in Japan are just above zero, meaning there is little room to cut rates to stimulate growth.

Analysts also said there is little appetite in Japan for further quantitative easing - or creating money to pump into the economy - as the policy proved unsuccessful in beating deflation in the past.

"I think the government and the Bank of Japan share the goal and there's no disagreement on a fight against deflation," David Cohen at Action Economics in Singapore told the Reuters news agency.

"But there is little the bank can do given its view that quantitative easing didn't achieve anything... all they can do is keep interest rates at [close to] zero."

Deflation depresses demand, and therefore economic activity, because consumers tend to put off major purchases as they know that prices will become cheaper in the future.

Despite deflation, figures released on Monday showed that Japan's economy grew by a better-than-expected 1.1% in the final quarter of last year.

This is the equivalent of an annualised increase of 4.6%.

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