Deflation returns to Japan as production drops

The Japanese economy slowed down in November after picking up from the March earthquake and tsunami. Production and retail sales tumbled, deepening the nation's return to the deflation that first took hold a decade ago.

Industrial output plunged 2.6 per cent from October, beating forecasts in a Bloomberg News survey of 29 economists. Retail sales were down 2.1 per cent while consumer prices excluding fresh food were down 0.2 per cent from a year earlier following a 0.1 per cent decline the previous month.

The weakening economy, hit by the debt crisis in Europe and companies' plans, from Panasonic Corp to Nissan Motor Co to shift production abroad, may undermine prime minister Yoshihiko Noda's plan to raise taxes and cut the country's debt burden. According to lawmakers who spoke to reporters in Tokyo today, a tax panel set up by Noda's party had called for doubling the nation's sales tax by 2015, a move some party members remain opposed to. They have also threatened to quit over the issue.

Analysts said the Japan's economy was on a downward slope and exports were falling, negatively impacting Japan's economy due to the global slowdown.

To spur demand and help rebuilding efforts, the Japanese government has approved four supplementary budgets since the 11 March earthquake and tsunami, worth around ¥20 trillion ($256 billion / Rs1,360,000 crore). A separate budget account would also be created for the fiscal year starting 1 April reconstruction.  

To help fill government coffers, Noda is pushing for a tax panel to decide on what to do about the sales tax by this week.