Japan has edged back into deflation, less than two years after it last escaped it, and joblessness is rising at a record rate, adding to the strains for the Japanese economy even as hard-hit manufacturers shows signs of stabilising.
Analysts expect deflation to accelerate to a record rate in coming months as the worst global recession in 60 years forces companies to cut prices, on top of sharp falls in commodity prices.
Adding to the pain, Japan's jobless rate jumped to a four-year high of 4.8 per cent with the availability of work sinking to a seven-year low with only half as many jobs as applicants.
The Bank of Japan has forecast two years of deflation and Takeshi Minami, chief economist of Norinchukin Research Institute said the price falls will accelerate.
“Deflation will be damaging to the economy. Companies will have difficulty increasing profits, and their effective burden from borrowing money will increase," said Takeshi Minami, chief economist of Norinchukin Research.
“With job conditions worsening, consumption will remain weak. As such, downward pressure from weak demand on consumer prices will continue.”
The core consumer price index, which excludes volatile prices of fresh fruit, vegetables and seafood but not oil prices, dipped 0.1 percent in March from a year earlier.
Though a smaller fall than the 0.2 per cent slip forecast by economists, it was the first annual decline since late 2007.
Up till then, Japan had suffered mild deflation since the late 1990s and some analysts warn of five more years this time around.
So-called core-core prices, which strip out both energy and food and is similar to the core index used in many other developed countries, fell 0.3 per cent, showing a wider range of products face downward pressure on prices.
Markets focused more on positive signs elsewhere in the world, pushing the yen to two-week lows against the US dollar as investors went shopping for riskier assets.
Japan's benchmark Nikkei share average rose 0.3 per cent, helped by the weaker yen.
Japan's economy slumped 3.2 per cent in the fourth quarter, and an even bigger contraction is forecast for the first quarter as companies feel the pain from the global financial crisis.
Reuters