Further deflation woes for Japan

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

Wholesale prices in Japan fell at their fastest pace to date in June, Bank of Japan data showed, raising further fears about deflation returning.

The cost of goods sold between firms fell 6.6% from a year earlier, the fastest pace of decline since records began in 1960.

It comes after consumer prices fell 1.1% in May from a year earlier.

During its "lost decade" of the 1990s, Japan was trapped in a deflationary spiral, where prices of goods fell.

'Cautious stance'

Deflation is 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.

Declines in oil and raw materials costs hit wholesale prices, but falling final goods prices also showed weak domestic demand .

Manufacturers have been cutting back on capital spending and axing jobs after a record GDP contraction of 3.8% in the first quarter.

"The slide in wholesale prices is highly likely to widen in July, August and September, exceeding 7% down the road. Today's data would help the Bank of Japan reinforce its cautious stance on the economy," said Tetsuro Sawano, of Mitsubishi UFJ Securities.