Inflation in Japan is rising at its fastest pace in 15 years, dimming the prospects of any serious “decoupling” from US and European woes and pushing the world’s second largest economy closer to the brink of stagnation.

Driven by dramatic advances in the cost of fuel, food and the imported raw materials on which the Japanese industrial juggernaut depends, average prices in June surged by 1.9 per cent from a year earlier.

The rise marked the ninth consecutive month in which the core consumer price index has lurched higher and the sharpest non-tax related spike since 1992.

The sudden return to inflation follows a lengthy period in which Japan was gripped by its exact opposite: a seemingly unbreakable cycle where prices were generally falling and companies were unable to generate much in the way of a consumer boom. Analysts, however, are convinced that Japan is now experiencing “bad” inflation.

"I am concerned that rising prices are putting a considerable burden on consumers,” said Hiroko Ota, the Economy Minister. “I am worried about the steep price hikes amid an economic slowdown”.

There are few signs that the relentless rise in prices is about to stop. Japanese companies, from foodmakers to engineers, have announced an extensive series of price increases between now and the end of September. The list includes possible 17 per cent price rises for fish, chicken and ham, and 33 per cent increases for dairy products.

By the alarming standards of inflation elsewhere in Asia — economies such as Malaysia and Vietnam are facing rates of more than 25 per cent — the leap in Japan’s CPI appears modest. But analysts were quick to warn that its effects on consumer sentiment could be devastating.

The surge in prices coincides with gloomy signs from Japan’s export sector — the engine room of the economy. The Government said yesterday that shipments in June tumbled by 1.7 per cent, another modest drop, but the first such decline in 55 consecutive months. With corporate profitability on the ropes, many Japanese employers have not increased their employees’ salaries for a long time — a gambit that they could get away with during the era of deflation.

“With wage inflation locked at zero, this jump in inflation is basically going to mean a real income loss for Japanese households,” said Hiroshi Shiraishi, Lehman Brothers Japan economist. “Having lived for so long in deflation, people are getting very worried and their reaction will be to tighten their purse strings even further.”

That, he added, would cause severe difficulties for an economy where consumer spending represents 55 per cent of GDP.

Throughout the deflationary era, one school of investment thought on Japan held that the return of inflation would finally kick-start the consumer economy.

But Kyohei Morita, chief Japan economist at Barclays Capital, believes that optimism is not justified in the current situation. “I don’t buy into the story that inflation is a good thing for Japan; it is a bad thing. We are seeing deteriorating terms of trade and that means slower capital expenditure and consumption.”

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