Japan has edged back into deflation, less than two years after it last escaped it, and joblessness is rising at a record rate, adding to the strains for the Japanese economy even as hard-hit manufacturers shows signs of stabilising.
Analysts expect deflation to accelerate to a record rate in coming months as the worst global recession in 60 years forces companies to cut prices, on top of sharp falls in commodity prices.
Adding to the pain, Japan's jobless rate jumped to a four-year high of 4.8 percent with the availability of work sinking to a seven-year low with only half as many jobs as applicants.
The Bank of Japan has forecast two years of deflation and Takeshi Minami, chief economist of Norinchukin Research Institute said the price falls will accelerate.
"Deflation will be damaging to the economy. Companies will have difficulty increasing profits, and their effective burden from borrowing money will increase," said Takeshi Minami, chief economist of Norinchukin Research.
"With job conditions worsening, consumption will remain weak. As such, downward pressure from weak demand on consumer prices will continue."
The core consumer price index, which excludes volatile prices of fresh fruit, vegetables and seafood but not oil prices, dipped 0.1 percent in March from a year earlier.
Though a smaller fall than the 0.2 percent slip forecast by economists, it was the first annual decline since late 2007.
Up till then, Japan had suffered mild deflation since the late 1990s and some analysts warn of five more years this time around.
So-called core-core prices, which strip out both energy and food and is similar to the core index used in many other developed countries, fell 0.3 percent, showing a wider range of products face downward pressure on prices.
Markets focused more on positive signs elsewhere in the world, pushing the yen to two-week lows against the U.S. dollar as investors went shopping for riskier assets.
Japan's benchmark Nikkei share average rose 0.3 percent, helped by the weaker yen.
Japan's economy slumped 3.2 percent in the fourth quarter, and an even bigger contraction is forecast for the first quarter as companies feel the pain from the global financial crisis.
While tentative signs of recovery have been seen in exports and output — both rising in March in seasonally adjusted terms — analysts say companies are still passing on the pain to households through cuts in wages and jobs.
As well, exports are only running at around half the levels of a year ago, even after the March rises.
"The Japanese economy's current state is driven mostly by declines in exports and external demand. It won't recover easily," Finance Minister Kaoru Yosano said.
The number of jobless people has jumped 670,000 in the space of a year — matching a record rise a decade ago and putting pressure on the government to act in an election year.
"The number of jobs could have fallen by more than one million given conditions in the economy, but the government's package is curbing rise in job cuts," said Hiroshi Watanabe, senior economist at Daiwa Institute of Research.
The availability of work sank to a seven-year low with only half as many jobs as applicants.
Prime Minister Taro Aso plans to spend a total of 27 trillion yen ($280 billion) on economic stimulus, about 5 percent of gross domestic product.
The tough times has driven down earnings, further weighing on domestic consumption.
Japanese wage earners' total cash earnings fell at the fastest rate in nearly seven years in March from a year earlier.
Falling household income is expected to push down consumer prices as companies try to lure consumers into buying their goods by slashing prices, analysts say.
