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The rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the return to deflation that first took hold a decade ago.

Industrial output slumped 2.6 percent from October, a government report showed Wednesday. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month.

The weakening economy, hurt by Europe’s debt crisis and plans by companies 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 world’s largest debt burden.

“Fundamentally, Japan’s economy is on a downward slope,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “Exports are falling and negatively impacting Japan’s economy due to the global slowdown.”

To stoke demand and help rebuilding efforts, the government has approved four supplementary budgets since the March 11 earthquake and tsunami, worth around ¥20 trillion. A separate budget account will also be created for the fiscal year starting April 1 to pay for reconstruction.

The second consecutive drop in consumer prices occurred against a backdrop of weakening global demand and the yen’s advance against the dollar. The yen has strengthened almost 6 percent in the past 12 months, the best performer among Group of 10 currencies.

The yen’s gain has exacerbated woes caused by Thailand’s worst flooding in almost 70 years. The floods contributed to the drop in production, crippling the output in Southeast Asia of companies such as Sony Corp. and Honda Motor Co.

“The big drop in the numbers this time is due more to the Thai flooding than to the global economy,” Itochu’s Maruyama said. “In terms of the production numbers now, basically it’s on a downward trend in the long run.”

The biggest seasonally adjusted monthly drops in industrial production were in the information electronics industry, with overall output dropping 23.7 percent, Wednesday’s figures show. Passenger car output slid 12.6 percent; iron and steel production declined 1.2 percent.

“Industrial production is unlikely to recover to” levels seen before the 2008 global financial crisis, said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd.

Other data also suggest the recovery may be stalling.

Exports fell for the second straight month in November from a year earlier and capital spending in the third quarter dropped 9.8 percent. Large manufacturers are more concerned about business prospects, with the Bank of Japan’s “tankan” quarterly index of corporate sentiment falling to minus 4 this month. A negative figure indicates pessimists outnumber optimists.

The financial situation in the euro area, Japan’s third-biggest export destination, also shows no sign of improving, with 10-year Italian government bonds hovering around 7 percent. Fitch Ratings on Dec. 17 lowered the credit outlook of Spain, Italy and AAA-rated France, citing Europe’s failure to find a “comprehensive solution” to its crisis.

The appreciation of the yen is hurting exports, Finance Minister Jun Azumi said Saturday. He has indicated he’s prepared to sell the currency in the foreign exchange markets. The Finance Ministry said last week that it plans to raise the issuance limit for bills to fund intervention to an unprecedented ¥195 trillion.

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