Page last updated at 13:48 GMT, Friday, 20 November 2009

Deflation returns to the Japanese economy

Shoppers in Tokyo
Japan's government is less upbeat than its central bank

Deflation has returned to the Japanese economy for the first time since 2006, the government has warned.

The Cabinet Office said the falling prices could hurt the recovery of the economy, which left recession in the second quarter of this year.

The government's announcement came as the Japanese central bank kept interest rates on hold at 0.1%.

The Bank of Japan said the Japanese economy was continuing to be helped by policy measures at home and abroad.

Japan's economy grew by 4.8% in the July-September period - the second consecutive quarter of growth.

'Future discussions'

The Cabinet Office said in a statement that "Japan is in a mild deflationary situation".

The recent price falls are not right, and worrisome
Finance Minister Hirohisa Fujii

Keisuke Tsumura, parliamentary secretary of the Cabinet Office, said the government would now work with the central bank to tackle the situation, but that no plans had yet been decided.

"We have no specific ideas in mind at the moment," he said.

"It will depend on how discussions develop in the future."

Finance Minister Hirohisa Fujii said the situation was a concern.

"The recent price falls are not right, and worrisome," he said.

"This is one of the major policy issues right now."

Deflation is, as it sounds, the opposite of inflation, meaning that the general level of prices in a country is falling.

Declining prices might sound like good news for consumers, but in fact this is bad for everyone.

As people wait for prices to fall still further before buying consumer goods, it leads to a vicious circle of decreased spending and increased unemployment.

'The lost decade'

Japan has a history of struggling with deflation. The 1990s are often referred to as Japan's "lost decade" because of its 10-year struggle with falling prices.

It followed a collapse in prices in the housing market and the stock market at the end of the 1980s.

The central bank was criticised for not acting fast enough to cut interest rates.



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