Japan's economic gloom has deepened further with news that consumer prices fell in July for the 22nd straight month.

The decline was made worse by a new methodology introduced to reflect today's consumer trends more accurately.

The result was a 0.9% drop in core consumer price inflation barring fresh food, a figure thought to be 0.3% worse than it would have been under the old system.

According to the Japanese government, the data showed the "deflationary trend had become clearer" under the new figures.

In Tokyo, which is normally seen as leading the nationwide trend, consumer prices fell even further, dropping 1.2% in August.

Deflationary spiral

The news came a day after Japan's industrial output was shown to have slumped 2.8% in July, against forecasts of a 2.3% fall.

The main stock market index, the Nikkei 225, slid back below the 11,000 level to new 17-year lows, falling more than 2%.

A woeful performance by shares in New York - with the Dow down 171.32 points, a 1.71% drop, to 9,919.58 - contributed to the gloom.

That, in turn, was partly triggered by US economic data showing consumer spending there was flattening out, while consumer confidence figures released earlier this week by the Conference Board were also negative.

With companies retrenching and investment falling, the US is relying on the high-spending habits of consumers to keep recession at bay.

Rocky road for reform

The Japanese CPI figures cap a week when the drive for vital economic reforms appears to have become diluted.

Japan's government has signalled that key policies for dealing with the huge bad debt overshadowing the banking and corporate sectors could be delayed.

And its prime minister, Junichiro Koizumi, indicated he might be obliged to introduce supplementary budget spending to help levels of economic activity.

There have been massive budget injections almost every year since the deflation began in Japan at the beginning of the 1990s.

But apart from keeping the construction and farming sectors afloat - both important sources of support for the ruling Liberal Democratic Party - the main effect has been to inflate the budget deficit to record levels.