Bank of Japan expressed fear of deflation as wholesale prices plunged 6.6 percent in June from a year earlier, the biggest fall since bank began keeping data in 1960. Earlier in May, consumer prices dropped 1.1 percent as compared to last year.

Deflation affects the economy adversely since during deflation consumers have a tendency to delay purchases anticipating further plunge in prices. This, in turn, drags the further down.

Dipping oil and raw materials price played a vital role in bringing down the whole sale prices.

In addition, companies held back capital spending and hacked jobs as the economy shrank 3.8 percent in the first quarter.

Under the present circumstances, analysts are foreseeing at least two years of deflation.