Inflation in Japan is rising at its fastest pace in 15 years, reducing the prospect of any serious decoupling from American 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 is the sharpest non-tax- related spike since 1992.

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

Hiroko Ota, the Economy Minister, said: “I am concerned that rising prices are putting a considerable burden on consumers. I am worried about the steep price rises 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 that are due to hit consumers' wallets between now and the end of September.

The list includes possible 17 per cent price rises for fish, chicken and ham, and 33percent 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 increase in Japan's CPI appears modest. However, analysts gave warning 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 had fallen by 1.7 per cent, a modest drop, but the first 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 ploy that they could get away with during the era of deflation.

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

Such a scenario, Mr Shiraishi added, would cause severe difficulties for an economy in which consumer spending represents 55 per cent of GDP.

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

However, Kyohei Morita, the chief Japan economist for Barclays Capital, believes that optimism is not justified in the current situation. He said: “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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