The government’s pessimistic monthly economic report underscores the difficulties Japan still faces in its decade-long effort to end deflation.
The Nov. 16 report, which marked the fourth straight month the economic assessment was downgraded, said the "Japanese economy is in a mild deflationary phase."
That was a weaker assessment about the possibility of emerging from deflation compared with the October report, which said, "the tempo of deflation has been slower."
The consumer price index for September, excluding perishable foods, was 0.1 percent lower than September 2011, the fifth consecutive month of year-on-year declines.
The ratio of job openings to job seekers for September worsened over the previous month for the first time in three years and two months. That means the economy now has a tighter job market that will lead to a further restraint in consumer spending.
The government first said the economy was in a deflationary state in its March 2001 monthly report. It has yet to announce the economy has moved out of that state.
Many economists point to the gap between supply and demand for the persistent deflation. A negative gap means there is insufficient demand, making it easier for prices to fall.
The Cabinet Office calculated the gap as minus 15 trillion yen ($185 billion) on an annualized basis for the July-September quarter, the first worsening in three quarters. The gap was minus 10 trillion yen in the April-June quarter.
Between 2006 and 2008, the gap moved between a range of 4 trillion yen and minus 4 trillion yen. The inflation rate also hovered between zero and 1.5 percent.
However, after the collapse of U.S. investment bank Lehman Brothers in autumn 2008, the gap expanded to minus 33 trillion yen in 2009. Consumer prices have remained low ever since.
The Bank of Japan had initially forecast that the inflation rate would reach 1 percent in fiscal 2014. However, the central bank abandoned that goal in its biannual outlook released in October.
Some analysts said the BOJ’s monetary easing measures, in addition to those dealing with the demand-supply gap, have been insufficient.
"In areas such as agriculture and education, where limitations have been placed on corporate activity, latent demand of between 30 trillion and 40 trillion yen exists," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. "The government should implement deregulation in such areas to allow for the exploration of 'markets with potential.'"
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