Deflation spectre looms over Japanese recovery

29 June 2009

TOKYO: Hope that the beleaguered Japanese economy was pulling out of its worst recession since the war has been set back by a senior government adviser who pronounced that deflation might undermine a recovery.

Jun Saito, the Cabinet Office's chief economist and adviser to finance minister Kaoru Yosano, said that deflation "will exert a significant amount of downward pressure … raise real interest rates and that will restrain business investment." 

The warning, which comes as Japan's consumer prices index excluding fresh food dropped a record 1.1% in May, is based on government data and figures from the International Monetary Fund. Saito's analysis has found ongoing price declines have reached their highest level in 6 years, and have nearly doubled since last year.

Memories of Japan's last bout of recession in the 1990s – dubbed "the lost decade" – remain fresh in the minds of many policy makers, when consumer purchasing stalled, company profits dipped and wages had to be cut.

Masaaki Shirakawa, governor of the Bank of Japan, recently pronounced that he was "cautious" about the resilience of the tentative rebound in domestic and overseas demand. 

Data sourced from Bloomberg; additional content by WARC staff