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Japan deflation, unemployment hit records
(Agencies)
Updated: 2009-08-28 14:34

But it sees deflation as a result of weakness in the economy rather than the cause of it, so it doesn't view price falls as much of a problem as long as they are mild and seen easing down the road on the prospects of an economic recovery.

Still, if deflation deepens enough to affect the public's view of future price moves and to damage the banking system, the central bank may come under pressure to find ways to ease monetary policy further.

"The BOJ was a little bit in denial in first half of this year, but the CPI data may have them rethink their approach to policy," said Simon Wong, regional economist at Standard Chartered in Hong Kong.

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"There's no more talk of exit strategy. There may also be pressure to be more aggressive by saying they're committed to current policy until prices turn positive. They could also return to their form of quantitative easing."

Analysts say the opposition Democratic Party, which polls suggest is set to win Sunday's election, may ask the BOJ to support the economy by keeping interest rates low, especially after the politically sensitive jobless rate hit a record high.

"Wage growth has been plunging, and the Democrat's policies will go some way to making up for this. The Democrats should take the first step and implement what they've promised. This should be more effective than another stimulus package," Wong said.

The BOJ has taken various unconventional steps to lessen the impact of the global financial crisis, such as buying commercial paper and corporate bonds from banks.

Many market players expect the BOJ to extend the the programmes beyond their current expiry date in December.

In another sign of the weakness in the world's No. 2 economy, the jobless rate rose to a record high 5.7 percent in July and job availability sank to a record low of 0.42 per job seeker.

The number of unemployed rose 1.03 million from a year earlier, the biggest increase on record.

Household spending fell 2.0 percent in July from a year earlier, bigger than a median market forecast for a 0.5 percent fall.

Japan's economy returned to growth in the second quarter, pulling out of its longest recession since World War Two, but analysts warn of a rocky road ahead as the nascent recovery was based on short-term stimulus efforts around the world.

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