Japan reports record deflation - Unemployment hits six-year high

Japan reports record deflation - Unemployment hits six-year high
By Mure Dickie in Tokyo
Copyright The Financial Times Limited 2009
Published: July 31 2009 06:09 | Last updated: July 31 2009 08:34
http://www.ft.com/cms/s/0/9490f6ec-7d8f-11de-8f8d-00144feabdc0.html


Japan set a new record for core consumer price deflation in June, while unemployment hit a six-year high, data released on Friday showed.

The 1.7 per cent year-on-year fall in consumer prices excluding fresh food and the 5.4 per cent jobless rate highlight the continuing troubles of the world's second largest economy, despite a sharp rebound in industrial output over the last four months.

While the falling energy prices that have been the main driver behind the decline in the consumer price index are no bad thing for resource-poor Japan, analysts increasingly worry that deepening deflation fuelled by job insecurity and massive manufacturing over-capacity could undermine economic recovery.

The fall in "core-core" consumer prices, which exclude food and energy, accelerated to 0.7 per cent in June. More recent July price data for urban areas of Tokyo showed a fall of 1.1 per cent.

Although there has been record growth in industrial production over the last quarter – including a 2.4 per cent month-on-month rise in June – output is still down by more than one fifth since last year, leaving large excess capacity sure to put pressure on prices.

South Korea on Friday reported a 5.7 per cent month-on-month rise in industrial production, more than double the pace economists expected, while Thailand reported a 3 per cent rise.

Japanese consumer sentiment is likely to remain vulnerable to the continued rise in unemployment, which is already at a level last seen in June 2003, and is expected to climb past the 5.5 per cent record rate set that year.

Labour industry data released on Friday showed that work availability was already at a record low, with only 43 jobs on offer for every 100 applicants.

With the Bank of Japan's policy interest rate already at a meagre 0.1 per cent, the central bank has little in its conventional tool box with which to tackle price falls.

The Organisation for Economic Co-operation and Development has called for the Bank of Japan to "fight deflation through a strong commitment to implement effective quantitative measures".

However, the BoJ remains relatively relaxed.

In a speech last week, Hirohide Yamaguchi, central bank deputy governor, said "large short-term" price changes could not be avoided after a shock of the scale suffered recently by Japan, but that the BoJ expected deflation to moderate in the six months to March 2010 as the economy recovers.

"The bank therefore thinks it unlikely at present that prices will continue to decline and thereby lead Japan's economy into a deflationary spiral," Mr Yamaguchi said.