Deflation in Japan ?

Contrary to the expectations of Japan's central bankers who had expected accelerating inflation and had raised interest rates accordingly,   the latest data shows that once again prices overall have fallen in Japan.The year to year core inflation rate fell 0.1% in February.
Because of this a number of economists and analysts are arguing that the Bank of Japan has prematurely increased interest rates and ought to now cut the bank rate.The bank rate is currently .50 % . This is an extremely low rate by Canadian standards but Japan had only recently escaped a decade long period of deflation marked by consistantly falling prices, sluggish growth and accumulating inventories of unsold goods. The growing supply of quality goods from China and India only complicates the problem.

Since the Japanese economy is a substantial chunk of the G7 GDP( its current GDP is 4.2 trillion US dollars on a purchasing power parity exchange rate basis making it the third largest economy after the US and China and one third the size of the American economy and three and a half times as large as the Canadian economy) any signs of a return of deflation ought to cause observers elsewhere to sit up and take careful notice.

Given that there is a fair bit of evidence of a slowdown in economic activity in Canada and the US particularly in housing and manufacturing and that countries such as Canada are still running significant budget surpluses and keeping interest rates in real terms relatively high -   over 3 % in real terms- there is a definite risk of a global bout of slow growth and rising unemployment.