Japan warns, deflation drags recovery

TOKYO (AP) - Japan's government says the economy is in deflation for the first time in more than three years, warning that falling prices and a further worsening of the labor market could drag on the weak recovery.

The statement about deflation, coming in the Cabinet's monthly economic report Friday, is hardly a surprise as Japan's consumer price index has been declining since March.

But it shows that Japanese leaders are clearly worried about the trend, which comes amid hopeful signs of recovery in exports and industrial production.

It was the first time since August 2006 that the report identified deflation as a problem.

Falling prices may sound like a good thing, but deflation can hamper economic growth by depressing company profits, lead to wage cuts and cause consumers to postpone purchases. It can also increase debt burdens.