There are fears that the world’s second largest economy could be heading for deflation after figures from the Ministry of Finance revealed that Japan’s core consumer price index (CPI) fell 1.1% in May compared with the same month last year - the most since records began almost forty years ago.
The country’s Finance Minister, Kaoru Yosano, said: “We must carefully manage the economy so that it does not collapse further and enter into a deflationary spiral.”
A short period of deflation (where prices fall rather than increase) could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.
Without consumer spending to stimulate growth, economic output falls.
Deflation was a problem for Japan during its so-called “Lost Decade” in the 1990s.
According to Richard Jerram, an economist at Macquarie Securities, Japan looks like it is heading for another period of deflation.
The export-dependent economy, which was once seen as relatively unscathed by the global financial crisis, has been hit by a slump in demand for its products overseas, particularly cars and electrical goods. During the first three months of 2009, Japanese exports plummeted by 26%.
Japan’s economy contracted at an annualised pace of 14.2% in the first three months of the year.
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