WHILE investors have been fretting recently about Japan's huge debt, another of the dreaded D-words has come back to haunt them. On Friday November 20th, Japan's Cabinet Office issued a monthly report that for the first time since 2006 acknowledged that the country was suffering from deflation.

Consumer prices have actually been falling for months, but the pace of decline accelerated over the summer. In September prices slumped by 2.2% compared with a year earlier. This is partly because the country is still loaded with excess capacity after the collapse in exports during the global financial crisis, and partly because oil prices were lower in September than in the same month last year. But there are more structural problems, too. As Japan's population declines, for instance, retailers are being forced to cut prices to gain market share.

It was no coincidence that the new government of Yukio Hatoyama chose the day when the Bank of Japan (BoJ) was holding a rate-setting meeting to make a lot of noise on the issue. Both the deputy prime minister and finance minister made concerned comments. Their unspoken message to the BoJ was clear: remove monetary-stimulus measures at your peril. At the end of its two-day meeting, the BoJ left its policy rate unchanged at 0.1%, and continued to use other measures, such as buying government bonds, that it believes make monetary policy “extremely accommodative.”

But the BoJ does not give the impression it is particularly concerned about prices. It believes there are not yet clear signals of a deflationary mindset in corporations or the public at large, and that a recovery in private demand will eventually pull the economy out of its slump.

Some economists think this reflects a dangerous complacency. The BoJ's own recent forecasts predicted that the year-on-year change in the consumer price index excluding fresh food would be negative this year, next year and in 2011. On Thursday, the OECD issued a strong injunction to the BoJ to fight deflation by committing to keep interest rates low and implementing quantitative-easing measures until inflation turns “firmly positive”. Some advocate even more radical steps to reflate the economy, such as charging banks to deposit money at the central bank. Proponents of these measures fear that businesses will retrench as prices fall and their debts rise, creating a vicious circle.

The government, too, is keen for the BoJ to keep doing its bit to stimulate growth, because the fiscal deficit is already projected to reach 10% of GDP next year and it has expensive campaign promises to keep. The government was given a dose of good news on Monday when it was reported that economic growth picked up in the third quarter, reaching 4.8% on an annualised basis, which was better than expected. But much of that was spurred by public spending; domestic demand was still weak and the domestic-demand deflator (a measure of inflation excluding effects related to import and export prices) was at its lowest level in more than 50 years, according to Lombard Street Research, an economic consultancy.

It is not only the BoJ that needs to do more to combat deflation, however. Mr Hatoyama's government, in office since September, has so far failed to spell out clearly its economic policies. It says it wants to rebalance the economy by spurring domestic demand, but has not made it clear how it intends to do that. Meanwhile, it has suggested meddling with wages and hiring-and-firing practices that exporters say would further weaken them at a time when they are struggling to cope with a high yen.

Raising Japan's trend growth rate would be difficult, especially as the population ages and shrinks. But it is not impossible: productivity could be improved dramatically, especially in the services sector. A sustained period of higher growth would have a double-barrelled effect of killing both the debt and deflation problems. If the double-D scares of the past few weeks help to convince Mr Hatoyama's government of this, it would be a good outcome. Sadly, that cannot be counted on.