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September 30, 2009

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CPI declines at record pace in Japan

PRICES in Japan tumbled at a record pace in August, intensifying concerns that deflation could undermine the country's fragile economic recovery.

The country's key consumer price index, which excludes volatile fresh food prices, fell 2.4 percent from a year earlier amid rising unemployment and falling wages, the government said yesterday. The figure marks the steepest decline since officials began compiling comparable data in 1971.

The result matched the average market forecast in a Kyodo news agency survey.

Core CPI has now dropped for six straight months and suggests that the world's second-largest economy could face another bout of prolonged deflation.

The core CPI for Tokyo retreated 2.1 percent in September, according to the statistics bureau. The result suggests that prices nationwide are headed further south. Prices in the nation's capital are considered a leading barometer of price trends across Japan.

Lower prices may seem like 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.

Japan underwent a destabilizing bout of deflation during the 1990s, and again earlier this decade. The country emerged from a yearlong recession in the April-June quarter, but the economy is weak.

The Bank of Japan said last month that while some indicators show recovery, companies and consumers are still reluctant to spend. Economists expect Japan's unemployment rate to surpass a record high of 5.7 percent reached in July.

Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs, said in a recent report that it sees "no end to the vicious spiral leading from price decline to wage decline."

The big drop over the last few months stems mainly to lower oil prices, which are down more than 50 percent from last year. But the latest figures reveal that the downtrend now extends to other categories including clothes, household goods and recreation.


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