We are moving towards an area of deep deflation

Just part, is already back. The deflation that has undermined the Japanese economy from 1997 to 2006, for then gradually fade is confirmed in may, with the price excluding perishables record drop ( 1.1 over a year). This decline for the third straight month and especially its acceleration from April ( 0.1) is the highest since the origin of the index in 1971. According to the Ministry of Internal Affairs, the decline may unprecedented explained mainly by the fall of prices for leisure, electronic products as well as fuels. One year on the other, the cost of a tank of gas declined by an average of 26.4. Another reading of this index (excluding perishables, alcohol and energy) reveals a drop of 0.5 in may after 0.4 in April.

Mechanically, the continuous decline in prices is the result of an excess supply to a dull application. Japanese companies, which have yet adjusted their production to demand, are still surplus to the needs of consumers. Deflationary pressures are especially feared that they cause many damage hampering further activity. Households tend to accentuate the downturn by a report of their purchases, waiting for the cheaper next day until the night before. But also see their capacity to repay their debts altered since the value of the assets provided as collateral, such as real property, continues to decline. Businesses fear swelling of their stocks and an explosion of their debt. Only rosy Outlook as possible, in some cases, a significant fall in prices may boost demand, said Takuji Aida, UBS Economist.

To assess the extent of the spiral

Remains of course now assess the extent of this spiral. "We are moving towards an area of deep deflation." "The worst yet to come", said David Yen, an economist at Société Générale, which provides a "dramatic acceleration of deflation in the second half." Takuji Aida, UBS analyst, is much more measured and "does not believe in the establishment of a deflationary spiral". "Movement took root in urban areas and should now extend to the whole country", for its part said Kyohei Morita, Barclay's Capital analyst. At this point, all believe that the low pricing should be reached in August, even at the beginning of the fall, with decreases of 2 per cent, and then fade. After having increased by 1.2 in 2008, prices overall could fall 1.5 in 2009, then 0.5 in 2010 (fiscal year), considers the Economist for Barclay's Capital.

For the Japan, this bad news of the return of deflation falls well wrong, at a time when the economy starts to out the head of the water. The recovery movement is not confirmed, but the worst seems past and the sense of consumers, such as the business community, began to improve. The Japan, which is the only one in Europe or the United States to undergo deflation, could see GDP rebound in the second quarter with the first effects of stimulus. But the betting is not yet won. "We need to manage the economy carefully, so that it collapsed not more, or is in a deflationary spiral," said Finance Minister, Kaoru Yosano, well aware that the most immediate risk is that the lower prices net stops all efforts to relaunch consumption made the last few months.