Japan is back in a period of falling prices for the first time in three and a half years, the government said on Friday, while its central bank left a key interest rate unchanged and upgraded its economic outlook, according to dpa. Deputy Prime Minister Naoto Kan said after a cabinet meeting that the economy was in a deflationary phase. Minister of Finance Hirohisa Fujii said he was very concerned. "We are aware of the serious risk," he said. The last time Japan"s economy was in deflation was between March 2001 and June 2006. Fuji said that fiscal policies alone such as higher public spending were not enough to reverse the trend of falling prices. He said the private sector had to supply much more of the stimulus. Fiscal policy played an important rule in such a situation, Kan said. Japan"s central bank on Friday decided, as was widely expected, to keep its key interest rate unchanged at 0.1 per cent. At the same time, the Bank of Japan (BoJ) upgraded its assessment of the country"s economy for the third month running. The world"s second-largest economy was improving because of recovering exports and fiscal stimulus measures, the bank said. "Japan"s economy is picking up mainly due to various policy measures taken at home and abroad," the BoJ said. Exports, a key motor of Japan"s economy, and production are rising thanks to a recovery in emerging economies, it added. Economists, however, warned that the recovery was not driven by a revival of domestic consumption. The sentiment was mirrored in the government"s monthly economic report, which said that the country"s economy was still in a tight spot. The situation on the job market remained grave, even if the unemployment rate dropped unexpectedly in September from 5.5 per cent to 5.3 per cent. Rising production in view of an uptick in exports is the main factor responsible for the lower unemployment. Japan"s gross domestic product rose in the third quarter by an annualized 4.8 per cent, outperforming analysts" expectations. According to BoJ estimates, Japan will remain in a period of falling prices for at least three years, while at the same time logging moderate economic growth. GDP is expected to grow by 1.2 per cent in the upcoming fiscal year starting in April, the BoJ said in its latest economic outlook released in October. In the current fiscal year, GDP is expected to contract 3.2 per cent.
