Japan saw a fourth month in a row of record deflation in August as weak domestic demand hindered an economic recovery from the worst recession in decades.
With rising unemployment weighing on consumer spending, the new government may need to take fresh stimulus measures to ensure the world's number two economy stays on a recovery path.
Japan's core consumer prices dropped 2.4% in August from a year earlier, the government said. Core prices, which exclude those of volatile fresh food, fell for a sixth consecutive month, after a 2.2% decline in July.
Compared with the previous month, however, prices were flat in August.
The deepening deflation comes despite recent signs of an improvement in Asia's biggest economy, which returned to positive growth in the second quarter of 2009, exiting a severe year-long recession.
The record year-on-year fall stemmed from lower petrol and other energy costs as well as weak domestic demand, which resulted in lower prices of holiday package tours, consumer electronics and entertainment costs.
The effect of lower energy prices will fade from September but 'deflationary pressure from the worsening jobs market will likely increase,' analysts said.
Economists expect data due on Friday to show Japan's jobless rate hit a record high 5.8% in August, up from 5.7% in July, as companies struggle to cope with the fallout from the economic slump.
Higher commodity costs and fierce price competition in the shops are making life tough for Japanese companies, many of which took a severe beating from the global economic downturn.
Japan was stuck in such a deflationary spiral for years after its economic bubble burst in the early 1990s and consumer spending has never fully recovered to become a major driver of economic growth.
The country's new government has vowed to boost household incomes, promising cash allowances for child-raising, a higher minimum wage and other measures including an end to highway tolls. But it is unclear whether the moves will boost consumer spending.
At the same time the latest upsurge in the yen's value is threatening exports, the driving force of the Japanese economy.
