Japan’s struggle with deflation worsens as prices fall


BBC News | 27 August 2010 | 07:07 GMT

Japan’s core consumer prices index fell for the 17th month in a row in July, underlining the country’s entrenched problems with deflation. The index, which excludes fresh food, fell 1.1% from July last year. Deflation is adding to economic worries in Japan, where the strong yen is making exports more expensive. Japan’s "lost decade" of deflation in the 1990s hit company profits as consumers delayed purchases to await even cheaper deals. The fall in the consumer prices index was slightly bigger than the 1% drop in June.

The Bank of Japan has so far held off from any substantial measures to tackle deflation, forecasting that consumer prices will turn positive in the fiscal year to the end of March 2012. Japan’s government was due on Friday to outline measures to support the economy and contain the strong yen, which hit a 15-year high against the dollar this week and could derail an export-led recovery.

"Given the yen’s gains, exports will slump temporarily and slow Japan’s economic recovery. Japan will thus remain in deflation for another two to three years," said Takeshi Minami, chief economist at Norinchukin Research Institute. Earlier on Friday, Finance Minister Yoshihiko Noda told reporters that the yen’s strength was having "various impacts" on the economy and that the situation was "serious".

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