In its economic assessment for November, the government announced that the Japanese economy is in a state of mild deflation ¡ª the first time since June 2006 that the monthly report has referred to deflation. The very mention of it indicates the government¡¯s sense of crisis over a possible rise in unemployment and more wage cuts.

Japan¡¯s real gross domestic product for July-September grew 1.2 percent from the previous quarter, or an annualized 4.8 percent. But nominal GDP, which reflects price movements, shrank 0.1 percent from the previous quarter, or an annualized 0.3 percent. It was the second straight quarter that nominal GDP underperformed real GDP. The consumer price index in September (CPI) ¡ª excluding perishables ¡ª dipped 2.3 percent from a year before, for the seven consecutive monthly decline.

Also worrisome is the downtrend in wages. The labor ministry says the average monthly wage in September was 1.6 percent lower than a year before, having shrunk for 16 straight months. Summer bonuses this year were about 10 percent lower than last year and winter bonuses are expected to see the largest drop in 20 years.

Lower wages force people to tighten their purse strings, leading retailers to cut prices to attract consumers. Price cuts reduce corporate profits, leading to job and salary cuts, which in turn lead to more price cuts. If the cycle continues this way, there is danger of a deflationary spiral.

The government apparently wants the Bank of Japan to take further easy-money measures. Yet, hours after the government¡¯s monthly report was announced, the BOJ upped its assessment of the economy, saying it is ¡°picking up¡± ¡ª despite its prediction of a drop in core CPI for three years through fiscal 2011. BOJ Gov. Masaaki Shirakawa said that given the low consumer demand, just increasing liquidity will not lead to price rises.

Given the virtual zero interest rate, the government cannot rely on the BOJ. It should hurriedly strengthen measures to prevent unemployment from growing and create more jobs. It also should work out a long-term policy to increase domestic demand.