Japan edges back into deflation

Japan edges back into deflation
By Michiyo Nakamoto in Tokyo
Copyright The Financial Times Limited 2009
Published: May 1 2009 03:44 | Last updated: May 1 2009 08:38
http://www.ft.com/cms/s/0/ba75d7c0-35f9-11de-a997-00144feabdc0.html


Japanese consumer prices fell in March for the first time in 18 months, stoking fears that the recession afflicting Japan could be aggravated by persistent deflation.

Nationwide core consumer prices fell 0.1 per cent year-on-year in March, reflecting declines in oil prices and weakening demand.

“The threat of a more damaging deflationary spiral is…real,” said Julian Jessop, chief international economist at Capital Economics in London.

The first drop in the core consumer price index since September, 2007, comes as unemployment in March rose to a four-year high of 4.8 per cent and wages fell by the most in six years.

“Labour markets are deteriorating very rapidly. The implicit weak demand is pushing the economy further into deflation,” said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

Manufacturers have been cutting wages, mainly by reducing overtime hours, in a desperate bid to deal with plunging export demand.

In March, overtime at manufacturers fell a record 49.5 per cent year-on-year, marking the 12th month of decline.

At the same time, however, labour demand over the last three months, “has fallen twice as quickly as in the early 1990s” during Japan’s so-called “lost decade”, when the country was mired in a banking crisis,” said Mr Jerram.

The job offers ratio fell to its lowest level in seven years, with just 0.52 jobs per applicant, reflecting a sharp drop in demand for labour.

Household spending has also continued to decline, falling in March for a record 13 months of declines – the longest period of declining spending since 1964.

Analysts warned of the risk that Japan faced continuing pressure on demand and prices.

“We see core CPI inflation rapidly falling further into negative territory due in part to the length and severity of the recession,” said Chiwoong Lee at Goldman Sachs, who is forecasting a 2.4 per cent year-on-year decline for the year to March, 2010.

However, Kaoru Yosano, finance and economy minister, yesterday denied that Japan was facing a period of persistent deflation.

“It’s too early to make a judgement based on the (CPI) alone that Japan has tilted greatly toward deflation,” Mr Yosano said.

BoJ governor, Masaaki Shirakawa, also brushed aside deflation concerns, saying earlier this week, Japan faced little risk of a deflationary spiral.

Mr Shirakawa’s stance on deflation comes despite the BoJ forecast in its outlook report published on Thursday that it expects prices to fall for two years, through fiscal 2010, “given the persistence of the negative output gap and continued weak developments in wages.”

The BoJ forecasts consumer prices excluding fresh food to decline 1.5 per cent in the year to March, 2010 and fall another 1.0 per cent in the year to March, 2011.

Nevertheless, on the positive side, “consumer confidence surveys show that households are actually becoming a little less worried about jobs,” Mr Jessop said in a note.

“For now, at least, there is no sign of permanently falling prices becoming embedded in consumer psychology,” he said.