Japan is in a state of deflation for the first time in about three years, the government declared Nov. 20, warning that falling prices and a further worsening of employment conditions may hurt the nascent economic recovery.

"Recent price developments show the Japanese economy is in a mild deflationary phase," the Cabinet Office said in its economic report for November.

That was the first reference to deflation in the government's monthly economic assessment since August 2006.

As for the overall economy, the Cabinet Office maintained its assessment for the second straight month, saying, "Although the economy has been picking up, it is short of autonomous factors and remains in a difficult situation, such as a high unemployment rate."