(RTTNews) - Consumer prices in Japan continued to fall at a rapid pace in October, official data showed on Friday, giving credence to the deflationary concerns of the government. However, a surprise decline in unemployment, along with household spending data put more of a positive, yet momentary, spin on things for the beleaguered economy.

Core consumer prices, which exclude fresh food from the price basket, dropped 2.2% in October from a year earlier, but slower than a 2.3% fall in the previous month, the Ministry of Internal Affairs and Communication reported. Economists had expected a 2.4% decline. General consumer prices dropped 2.5% year-on-year in October, after a 2.2% fall in prices in each of the three preceding months.

On November 20, the Cabinet Office declared that the economy is in deflation, the first official announcement of deflation since mid-2006. In its monthly economic report for November, the government said, "Recent price developments show that the Japanese economy is in a mild deflationary phase." The report said the economy is picking up, but faces difficult situation such as a high unemployment rate.

Last week, the Organisation for Economic Co-operation and Development warned against lingering deflation in the economy and said an increase in the central bank's bond purchases would help in battling deflation. According to the Bank of Japan's forecast in October, the CPI excluding fresh food, would fall 1.5% in fiscal 2009 and would drop 0.8% in fiscal 2010 and a 0.4% decline in fiscal 2011.
On a monthly basis, overall consumer prices dropped 0.4%, and excluding fresh food, prices fell 0.1%.

BNP Paribas economist Azusa Kato said that the slowing in the rate of decline in the core CPI was simply the result of a 'technical error', namely the waning base effect from surging petroleum product prices through August of last year. Excluding this, price deflation actually broadened in October, he pointed out.

Meanwhile, the CPI in the Tokyo area dropped 2.2% on year in November and fell 0.2% on a monthly basis. The core CPI fell 1.9% on a yearly basis, but slower than a 2.3% decline anticipated by economists. Month-on-month, core consumer prices were down 0.1%.

"Despite the economic recovery that has been driven by fiscal stimulus and rising exports to emerging economies, downward pressures on prices have hardly abated and the supply-demand gap remains quite large," Kato said. Even after the disappearance of techinical factors around February, BNP Paribas expects that a minus inflation rate of more than -1% should take root for a while, as deflationary expectations are taking hold at the consumer and corporate level.

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