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First and foremost, Japanese consumers tend to tighten their wallets during times of uncertainty. Businesses tend to refrain from spending on new equipment and plants. The figures can be seen in the Nationwide Department Store Sales which are still printing in a negative territory (-2.1% in May), Convenience Store Sales (-3.2% in May), Corporate Service Price (-0.8% in May), Supermarket Sales (-5.3% in May), and Lending ex-Trust which printed at -2.1% in May. Overall, consumers and businesses alike will refrain from spending, putting a downward pressure on the prices.

Secondly, the Japanese government is pursuing a policy of a stronger Yen at this juncture in time. This was implemented to transform the economy from export orientated to a more robust consumer oriented economy. China has an ability to surpass Japan as the second leading consumer nation and navigate from the uncertainties of the markets abroad. Japan is trying to initiate the same principals right now, largely through a policy of a stronger Yen. A stronger Yen, however, for a medium time frame will have a negative impact on the country. Price declines tend to persist as the currency rises, which will be experienced in Japan. This will also continue to happen in the second half of the year.

The Yen will continue to slip lower due to austerity measures which the government promised to implement. If you noticed, the Pound rallied once the proposed budget tightening and reduction of debt happened. Currently, markets are rewarding countries which tighten their budgets and reduce debt due to sovereign debt issues in Europe. Therefore, any nation proposing to tighten their balance sheets, which Japan is at the current point in time, will be rewarded with a higher value of its currency. And lastly, financial regulations proposed by the G20 meeting will once again put risk aversion in play. Risk aversion tends to be Yen positive.

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Source: Japan and Its Consistent Deflation