Page last updated at 03:44 GMT, Tuesday, 29 September 2009 04:44 UK

Japan prices continue record fall

Shoppers walk past Sale sign

Japan's core consumer prices dropped 2.4% in August year-on-year, the fourth successive month of record falls.

Official figures showed core prices, which exclude those of volatile fresh food, fell for a sixth month in a row.

The record fall for August was due to lower petrol and other energy costs as well as weak domestic demand.

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

Lower prices may appear to be a good thing, but deflation can hamper growth by depressing company profits and causing consumers to postpone purchases, leading to production and wage cuts. It can also increase debt burdens.

The deflation comes despite recent signs of an improvement in the Japanese economy, which returned to positive growth in the second quarter of 2009, exiting a severe year-long recession.

Not to worry?

The central bank has expressed confidence that low interest rates and the stimulus packages it has already implemented will prevent deflation taking hold again.

Analysts are not so sure.

Several have said that although the impact of last summer's spike in the oil price will lessen towards the end of the year, they expect further falls in prices.

"Reflecting stagnant retail sales, falls in prices are spreading more broadly than we had expected," said Susumu Kato, chief economist at Calyon Securities.

"There's a chance that deflation might continue longer than expected."

Few economists expect falls in prices to accelerate sharply but weak domestic demand is likely to keep up the deflationary pressure.

The Bank of Japan has already forecast deflation to last until the year to March 2011 and is expected to extend its deflation forecast by another year in its next set of forecasts due out in late October.

Separately, the Japanese Finance Minister Hirohisa Fujii said that it is important not to overreact to current foreign exchange moves, which he said are within a natural "margin of error".

The yen surged to an eight-month high against the greenback on Monday.

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