It's official: Economy hit by mild deflation

The government declared Friday that the economy is in a state of deflation, triggering fears that falling prices will affect wages and employment and undermine the incipient economic recovery.

In its monthly economic report for November, the government said "recent price developments show that the Japanese economy is in a mild deflationary phase."

It is the first time since June 2006 that the government has acknowledged the economy is experiencing deflation.

"Even though the entire economy is picking up, the prospect is that a deflationary state will continue for a while," said Deputy Prime Minister Naoto Kan, who is also state minister for economic and fiscal policy.

Kan said the assessment reflected falling consumer prices, declining nominal gross domestic product and sagging domestic demand.

The nominal GDP was lower than the real GDP in the past two consecutive quarters. It has also dropped from the previous three-month period for six quarters in a row, while real GDP grew for the past two quarters.

Despite a pickup in production, the fall in nominal GDP shows the recovery has not translated to improved earnings and income for businesses and the public.

The government in its monthly economic report in March 2001 acknowledged that the domestic economy at that time was in a state of mild deflation.

As prices gradually ceased to decline, the government removed the word "deflation" from the monthly report in July 2006, without formally declaring an end to the deflationary state.

Concerns over a recurrence of deflation grew after Japan was hit particularly hard by the global economic crisis that began in fall 2008.

Kan told a news conference the government would quickly compile an employment-focused economic stimulus package.

He also expressed hope that the Bank of Japan would "follow up with measures from the monetary side."

Kan said he hoped the central bank would continue its policy of very low interest rates to supply funds to the market.

"It is too soon to use an exit strategy," Kan said. "The current policy should continue. I hope (the announcement of deflation) will be taken as a message like this."

The monthly report for November cited concerns that deflation--along with other negative factors, such as the "severe" employment situation and financial and capital market fluctuations--could dampen the recent upswing in the economy.

"Although the economy has been picking up, it is short of autonomous factors and remains in a difficult situation," the report said.

The government's concern is shared by the Organization for Economic Cooperation and Development, which said in its Economic Outlook report released Thursday that "deflation will persist" in Japan.

While welcoming the bottoming out of Japan's economy, the OECD report said unemployment would likely stay around 5.5 percent through 2011.

Kan, who met Thursday with visiting OECD Secretary-General Angel Gurria, said they both had similar assessments of the current situation.

In a speech in Tokyo on the same day, Gurria also called on the Bank of Japan to "fight deflation through a strong commitment" to keep interest rates at very low levels and to implement quantitative measures.(IHT/Asahi: November 21,2009)