Japanese prices continue to fall

Car part production bounced back in August after July's earthquake

There are signs the Japanese economy has not yet escaped from deflation, with consumer prices falling for the seventh straight month.

Consumer prices fell 0.1% in August compared with the same month of 2006, making a rate rise from the Bank of Japan less likely this year.

Industrial production was stronger than expected in August, despite the problems on global stock markets.

Industrial production rose 3.4% compared with July.

It was helped by a recovery in car production, which had been slowed by an earthquake in July.

Exports also grew, despite the market problems for some of Japan's biggest customers such as the USA, but analysts say it is too early to conclude that the slowdown there will not hit Japan.

Interest rates

"If there is to be some impact, that will show up in orders in September at earliest," said Yoshimasa Maruyama at BNP Paribas Securities.

"I think automobile makers are the most sensitive and they are holding the key," he added.

Economy minister Hiroko Ota claimed that the economic recovery is still on track, despite falling prices.

"Although the consumer price index remained in negative territory, there is not much change in price conditions and an exit from deflation is in sight," he said.

The Bank of Japan is keen to raise interest rates from their current level of 0.5% but will struggle to do so while prices are falling.