Japan runs the biggest risk among industrialised nations of falling into deflation late next year, the OECD said today as the global economic downturn and protracted financial crisis cloud the global growth outlook.
The Organisation for Economic Cooperation and Development, a think tank for rich nations, said the global financial crisis could disrupt Japan's finance sector and in turn hurt consumption and investment.
"There is also a risk that slower growth would push Japan back into deflation," the OECD said in the report.
The world's second-largest economy had a decade of deflation from the 1990s as it struggled to shake off the lingering effects of the end of a bubble economy.
Commodity prices tumbled and US consumer prices fell at a record pace in October, fuelling fears of deflation in developed countries.
The OECD forecast that Japan's consumer price index would turn negative in the third quarter of 2009 with an annual rate of minus 0.3 per cent. It also expects the index to stay in negative territory throughout 2010.
In a forecast issued on November 13th, the OECD slashed its output expectations for the United States, Japan and the euro zone, and said it expected Japanese GDP to drop 1 per cent in the fourth quarter and 0.1 per cent in 2009.
The OECD's view contrasts with that of the International Monetary Fund, which said in an economic outlook for Asia on Monday that the risk of deflation in Japan was low but also said the strains from the global financial crisis could extend beyond 2009, exerting more pressure on the region.
Japan fell into recession as gross domestic product shrank in July-September for the second quarter running and many economists expect the weakness to continue in the coming quarters.
Japanese business service prices dropped by the largest amount in five years in October compared with a year earlier, government data showed today.