Japan's unemployment rate rose to a record 5.7 per cent in July while consumer prices fell at a record pace, according to research released today.
Core consumer prices tumbled a record 2.2 per cent in the year to July with price falls broadening on weak final demand, suggesting deflation is taking root in the country for the second time in less than five years.
The jobless rate hit a record high and job availability sank in July, suggesting deflation could last longer than the Bank of Japan currently expects, keeping it from raising interest rates, already low at 0.1 per cent, until at least 2011.
In another sign deflation is becoming more pervasive, the so-called core-core consumer price index, which strips out food and energy costs, marked its biggest annual fall in seven years.
Still, the BOJ is unlikely to revert to full-blown quantitative easing and flood the banking system with excess cash as long as price falls narrow in the months ahead.
"The fall in nationwide core consumer price index (CPI) may moderate towards the end of this year as the base effect of last year's commodities price surges tapers off, but CPI drops of around 1 per cent are foreseen well into next year in the face of a widening output gap in Japan," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"As the BOJ has already forecast continued price falls for next year in its twice-yearly outlook report, the bank is unlikely to carry out additional measures to cope with deflation but is expected to merely keep rates steady."
The fall in the core CPI, which excludes volatile fresh food prices but includes oil costs, matched a median market forecast and was bigger than a 1.7 per cent drop in June, data showed today.
The yen eased slightly to 93.61 against the dollar from about 93.56 before the data.
Consumer price falls, which logged a record for the third straight month, are expected to moderate when the base effect of last summer's spike in energy prices fade later this year.
But weak domestic demand is expected to keep weighing on prices. The 0.9 per cent annual fall in core-core CPI, which is similar to the core index used in other developed countries, was the biggest drop since July 2002 and was the fifth straight month the pace of decline accelerated.