Deflation Threatens Japan

As Japan struggles to bolster its economy, signs are emerging that its economic troubles are sinking deeper and wider into the national economy. CBS News Correspondent Barry Petersen reports.

Supermarkets in Japan are taking economic law into their own hands by discounting products. Stores just can't wait for the government to reduce the five percent national sales tax to jump-start the economy.

And there is another sign of the times. Toyota dealers are slashing prices and losing profit just to get cars out the door.

"Profitability at this point Japan is deteriorating quite rapidly," says Andrew Shipley of Schroders Security.

What economists

Paychecks are shrinking as companies cut overtime because production is cut back as demand keeps slowing.

Less money means people buy less, sales fall, prices and profits fall even more.

"Now in Japan we're slipping into an evil deflationary spiral. Â…the more deflation gets worse, the more firms cut back prices. This causes the economy to weaken more, and causes prices to fall even further and the whole cycle repeats itself," says Shipley.

And what if deflation gets out of control? It happened once in this century.

"You end up like you did in the 1930s where output could go down 20 percent. We're talking outright depression," says Brian Rose of Walburg, Dillon, Reed.

In the last decade Japan led the world in growth and prosperity.

Now it may be leading the world down an opposite and far more dangerous path.

Reported By Barry Petersen