TOKYO (MarketWatch) -- Japan's core consumer price index fell 1.1% in May from the same month a year earlier, according to government data released Friday, indicating risks that the nation might be slipping back into deflation. The drop was in line with expectations of economists polled by Dow Jones Newswires and Nikkei. The core figure excludes volatile fresh food prices. Core CPI fell 0.1% on year in April. See last month's CPI results. The core consumer price index for June for the Tokyo metropolitan area, which is considered a leading indicator of the nationwide figure, fell 1.3% on year, faster than the 1.1% fall economists had expected. "The steady worsening of the underlying rate is more of a concern, and it looks like Japan is heading for another lengthy period of deflation," Macquarie Research economist Richard Jerram said in emailed comments. Deflation was a pervasive problem during Japan's so-called "Lost Decade." In the six years through 2004, the consumer price index dropped about 4%. Deflation raises the value of debt over time, increasing its burden. It tends to prompt companies to put a higher priority on paying down debts quickly instead of putting spare cash toward capital investment. It also weighs on household spending, as consumers put off major purchases, expecting further price drops. "Deflation brings a range of problems," Jerram said. "This is not going to prevent the current inventory- and policy-driven cyclical upswing, but it does imply an impediment to medium-term growth."

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