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November 30, 2009

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Alarm bells ring as Japanese prices decline in October again

JAPAN has got word that prices fell again in October, just as a surging yen threatens to worsen the deflation that is undermining the country's fragile economy.

The core consumer price index, which excludes volatile fresh food, retreated at a near-record pace of 2.2 percent from a year earlier, the government said on Friday. Prices have now fallen for eight straight months.

The news came amid heightened concern over the Japanese currency, which hit a new 14-year high against the dollar in early Asian trading. The greenback touched 84.41 yen (97 US cents) before recovering to low-86 yen levels.

A strong yen and deflation represent a perilous combination for the world's second-biggest economy.

Falling prices, which plagued Japan during its "Lost Decade" in the 1990s, may sound like a good thing. But deflation can hamper economic growth by depressing company profits, sparking wage cuts and causing consumers to postpone purchases. It also can increase debt burdens.

Meanwhile, a strong yen erodes the overseas profits of Japan's big exporters like Sony Corp and Toyota Motor Corp. It can also aggravate deflation.

Prices of imports and raw materials decline, which then pushes domestic consumer prices lower.

"In the midst of deflation, such a sharp rise in the yen is a very serious problem and could drag down the economy," said Fujio Mitarai, head of the Nippon Keidanren, the country's biggest business group. "I certainly hope the government responds with emergency steps."

Concerns about debt problems afflicting Dubai have driven investors to the yen as a safe haven. Dubai World, a government investment fund with debts of US$60 billion, has asked creditors if it can postpone payments until May.

On the labor front, the government released better news. Japan's unemployment rate improved to 5.1 percent in October.


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