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The country’s decades-long deflation is largely attributable to a chronic demand shortfall and heavy dependence on exports to China and other emerging economies where price competition is tough, according to a government report issued Friday.

The Annual Report on the Japanese Economy and Public Finances released by the Cabinet Office notes that the nation was prone to deflation because of structural problems long before the financial crisis hit the global economy in 2008, driving price levels down across the world.

As one cause of deflation, the report says Japan took longer than other countries to deal with “the negative legacies of the bubble economy,” including bad loans and excessive debt, leading to the disruption of fund flows, snail-paced economic growth and deficient demand.

Japan has struggled with a shortfall in demand over almost 20 years since the economic bubble burst in the early 1990s, it says.

Although many other countries suffered deficient demand following the 2008 crisis, “only Japan is in a notable trend of deflation among leading industrialized nations at the moment,” the report says.

The government declared last November that the economy was in deflation, its first such announcement in three years and five months since the previous period of deflation from March 2001 through June 2006.

The economic structure, in which growth depends heavily on exports, has also worsened deflation, the report says.

Export-oriented companies are under pressure to rein in production costs as they seek to sell products at competitive prices in foreign markets. Such pressure is especially high when the products are exported to emerging economies where labor costs are low.

The report calls for government action to enable firms to focus more resources on competition in areas other than prices.

It also stresses the need for the government and the Bank of Japan to “make coordinated efforts to achieve sustainable economic growth under stable prices.”

The shortfall in demand not only caused deflation but also contributed to pushing up the jobless rate by around 2 percentage points in 2009, when it stood at 5.1 percent, up 1.1 percentage points from the previous year, according to a Cabinet Office estimate.

If demand and supply had been well-balanced, the unemployment rate could have held at around 3.5 percent in 2009, it says.

To rectify the gap between supply and demand, the report urges the government to work on creating demand and jobs in areas with high growth potential, including health care and green energy, as well as to capitalize on demand in fast-growing Asia.

In the latest phase of deflation, price levels have plunged at a much sharper pace among a broader range of products, including low-priced daily items, compared with deflation in the early 2000s, as demand shrank sharply in line with a deep recession stemming from the financial crisis.

Deflation has also been prolonged as an increasing number of consumers expect prices to remain low for the next year, the report says.

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