Page last updated at 08:45 GMT, Wednesday, 12 August 2009 09:45 UK

Japanese prices in record decline

Japanese shoppers
Consumer prices in Japan are also falling

Japanese wholesale prices were down by a record 8.5% in July compared with a year earlier, highlighting the growing deflationary pressure in the economy.

Weak demand during the downturn and the fall in the price of oil have put downward pressure on prices.

On Tuesday, the Bank of Japan kept interest rates at 0.1% to try to boost consumer demand.

Revised figures also showed that industrial output rose 2.3% in June, down from the initial 2.4% estimate.

Recent data showed consumer prices had fallen by a record 1.7% in the year to the end of June.

Downward pressure

Although the impact of last summer's spike in the oil price will lessen towards the end of the year, analysts expect further falls in prices.

"We're going to see increasing downward price pressure from weak demand," said Takesh Minami at the Norinchukin Research Institute.

"The Bank of Japan has said that the country is not entering the deflationary spiral, so it won't ease monetary policy further. The bank will keep interest rates on hold at least until March 2011," he added.

Japan, the world's second largest economy, experienced a prolonged period of deflation in the 1990s, commonly referred to as "the lost decade".

But the central bank is confident that low interest rates and the stimulus packages it has already implemented will prevent deflation taking hold again.

However, in keeping interest rates on hold on Tuesday, the bank underlined its cautious outlook for the economy.

It said conditions in the world's second-largest economy had stopped worsening, but that unemployment would stay high and consumer spending low.

Last month, the bank forecast that Japan's economy would shrink by 3.4% in the 12 months to 31 March 2010.

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