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Japan announces shock return to deflation

Even though the Japanese economy has been affected by deflation since the late 80s, many had assumed that the recent pull away from recession would kill the monster of deflation once and for all. However, the Japanese authorities have today confirmed that the Japanese economy is now in a mild deflationary period for the first time since 2006. Even though the situation is described as "mild" there is no doubt that deflation is a monster which can kill any economic upturn stone dead.

In simple terms, deflation puts pressure on consumer prices which then puts pressure on business costs which then leads to unemployment and a vicious circle. The Japanese authorities are working together with the central bank to try and tackle the problem and return the economy to a more traditional recovery phase. Interest rates will remain at 0.1% for the foreseeable future and we are likely to see a number of government initiatives in the short to medium term to encourage spending and activity in the economy.

Whether the Japanese authorities will require assistance from overseas central banks in the short to medium term remains to be seen but this just goes to show that despite growing by 4.8% between July and September, the Japanese economy has been unable to shake off the shadow of deflation.

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