Page last updated at 12:17 GMT, Friday, 29 January 2010

Japan deflation hits a record pace to threaten recovery

Japanese shoppers
There is little incentive for consumers to spend when prices are falling

Japanese consumer prices fell at a record pace in December, according to the latest official figures.

Prices fell by 1.2% in the month, the biggest drop since the current consumer price index began in 1970.

Japan's finance minister has urged the Bank of Japan to move in step with the government to fight the problem of deflation.

But the governor of the Bank of Japan, Masaaki Shirakawa, said his current strategy was appropriate for now.

The price falls are measured by the so-called "core-core" consumer price index, which strips out the effect of volatile food and energy costs.

Separately, data showed that the unemployment rate in Japan fell from 5.2% to 5.1%.

Debt concerns

Japan's Prime Minister, Yukio Hatoyama , also called for co-operation from the central bank. He told parliament that the government will work with it to overcome falls in prices.

"I expect the BOJ to support the economy by guiding monetary policy appropriately and flexibly, while keeping close contact with the government, in a way that is consistent with government efforts," he said.

Japan's national debt is now about twice as big as the country's annual overall economic output, according to the IMF, and the credit ratings agency Standard and Poor's this week warned that it may cut the country's rating.

Deflation encourages people to hang on to their money because it will grow in value, rather than be eroded by inflation.

It also makes sense for people to delay buying goods because they expect future falls in prices. These factors depress demand.

Cutting interest rates is a standard way of getting people to spend more, but the Bank of Japan has held rates at almost rock bottom for years and has little room for manoeuvre.



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