Published: Thursday, 30 Jul 2009 | 9:37 PM ET

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Japanese core consumer prices fell a record 1.7 percent in the year to June, with weak consumer demand for goods playing an increasing part in pushing the country deeper into its second spell of deflation this decade.

It was the fourth straight month of decline, matching a median market forecast and accelerating from a 1.1 percent drop in May in another sign the world's second-largest economy is stuck in the doldrums with rising job losses and falling wages hurting household spending.

The unemployment rate hit a six-year high and job availability sank to a record low, suggesting consumers are unlikely to loosen their purse strings any time soon.

So-called core-core inflation, which strips out both energy and food prices and is similar to underlying inflation gauges used in Europe and North America, fell 0.7 percent from a year earlier after a 0.5 percent drop in May.

"If you look at the core-core CPI, the pace of declines has accelerated, suggesting price competition has been putting downward pressure on prices.

Consumers are becoming more conscious of cheaper products," said Yasuhiro Onakado, chief economist at Daiwa SB Investments.

"Firms including those in the retail sector are competing to get demand through offering cheaper prices, and that could put pressure on their profits."

The Bank of Japan is forecasting two years of deflation, so declining prices alone are unlikely to push it back into full-blown quantitative easing, which in Japan involved flooding the banking system with cash to meet a specific monetary target.

The drop in the core consumer price index, which excludes volatile food prices but includes energy costs, was driven in large part by a 14.7 percent drop in energy prices.

But there was also growing evidence of sliding final demand playing a larger part in overall price falls.

The drop in core-core inflation, which cuts out Japan's sliding energy bill, has accelerated for four straight months.

Core consumer prices for Tokyo, available a month before the nationwide data, also fell a record 1.7 percent in July from a year earlier, slightly more than a median market forecast of a 1.6 percent decline.

Having just emerged from almost a decade of deflation after the collapse of a property bubble in the 1990s, Japan's economy has been sideswiped by the global financial crisis that started in 2007 with a U.S. mortgage market meltdown.

The economy is expected to have grown a modest 0.4 percent in the April-June quarter after a record 3.8 percent decline the previous quarter.

But analysts say any recovery may be fragile as companies slash jobs and cut capital spending, weakening domestic demand.

Still, many central bank officials believe no policy action is needed unless there is a risk of Japan slipping into a deflationary spiral, in which falling prices and a weak economy feed into each other.

The BOJ believes the risk of this happening is small because the economy will likely pick up later this year with support from reviving global demand.

But some economists disagree.

"What's worrying is a pickup in the pace of decline in the so-called core-core index excluding both food and energy due to a huge output gap after a deep recession. The effect from this will continue to weigh on the core CPI, which will remain negative through next year," said Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute.

"The economy is picking up so it is unlikely that Japan will fall into a deflationary spiral, but such a risk could emerge if the economy's recovery stalls and the U.S. economy falters."

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BOJ board member Tadao Noda said on Thursday he expected annual core CPI to fall around 2 percent in July-September but then narrow its margin of declines as the effect of last year's energy price spike, which had pushed annual core CPI to a decade high of 2.4 percent in July and August last year, fade.

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