Taylor Marsh – TaylorMarsh.com – News, Opinion and Weblog on Progressive Politics

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Japan’s fledgling recovery is under threat from falling prices, the government said today, as it conceded that deflation had returned to the world’s second-biggest economy after a three-year gap.

The finance minister, Hirohisa Fujii, spoke of a “sense of crisis” over falling prices – the problem that plagued Japan during what’s known as its “lost decade” of economic stagnation in the 1990s.

Fujii’s comments came as the Bank of Japan (BoJ) kept interest rates at 0.1% and upgraded its assessment of the economy amid modest rises in exports and private consumption.

The cabinet office said in its monthly report: “Recent price developments show that the Japanese economy is in a mild deflationary phase.” However, the central bank appeared to ignore the report’s implication that it had to do more to tackle deflation, saying the recent fall in the consumer price index was likely to slow.

Fujii told a news conference: “Monetary policy is absolutely vital. It is like the lifeblood of the economy, so I want the BoJ to respond appropriately.”

The return of deflation for the first time since August 2006 had been expected but officials fear that flat consumption and a stagnant job market will strengthen the possibility of a double-dip recession. In the 1990s, consumers stopped spending in the expectation that prices would fall further. Faced with falling profits, companies were forced to squeeze wages, shed jobs and cut production.

Hiromichi Shirakawa, of Credit Suisse, warned: “If consumers expect prices to fall further, they will stop spending and try to save. That’s the biggest worry. That would have a knock-on effect on companies, on the government and everywhere.”

Snip

Japan is the second largest economy in the world. A double-dip recession in the land of the rising sun is a very bad thing for our own prospects.

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