Japan's inflation in record drop

In deflation, consumers tend to wait for prices to fall further

Prices in Japan fell by the most on record last month, raising fears of a new bout of deflation, official figures from the Ministry of Finance show.

Consumer prices fell 1.1% in May from the same month a year ago, the most since records began in 1970.

Prices of goods excluding fresh food also fell for the third straight month.

Japan was previously trapped in a deflationary spiral, where prices of goods kept falling, during its "Lost Decade" in the 1990s.

"We must carefully manage the economy so that it does not collapse further and enter into a deflationary spiral," Japan's Finance Minister Kaoru Yosano said.

Deflation damaging to an economy because consumers tend to delay making purchases until prices fall further. This in turn drives down prices more.

Without consumer spending to stimulate growth, economic output falls.

"It looks like Japan is heading for another lengthy period of deflation," said Richard Jerram, an economist at Macquarie Securities.

Though recent data has suggested that the worst may be over for the Japanese recession, the drop in consumer prices follows the worst contraction in Japan's economy in its history.

It shrank at an annualised pace of 14.2% in the first three months of the year.