Japanese deflation worst on record
2009-09-29

Category Consumer Spending Event 2008 Japan Recession Source (AFP)

TOKYO (AFP) - Japan saw a fourth straight month of record deflation in August as weak domestic demand hindered a recovery from the worst recession in decades, data showed on Tuesday.

With rising unemployment weighing on consumer spending, the new government may need to take fresh pump-priming measures to ensure the world's number two economy stays on a recovery path, analysts said.

Japan's core consumer prices dropped 2.4 percent in August from a year earlier, the steepest decline since comparable data became available in 1971, the government said.

Core prices, which exclude those of volatile fresh food, fell for a sixth straight month, after a 2.2 percent decline in July. Compared with the previous month, however, prices were flat in August.

"The deflationary trend is spreading because consumer spending is weakening," due to falling salaries and worker bonuses, said Hideyuki Araki, an economist at Resona Research Institute.

The effect of lower energy prices will fade from September but "deflationary pressure from the worsening jobs market will likely increase," Araki said.

Economists expect data due on Friday to show Japan's jobless rate hit a record high 5.8 percent in August, up from 5.7 percent in July, as companies struggle to cope with the fallout from the economic slump.

The deepening deflation comes despite recent signs of an improvement in Asia's biggest economy, which returned to positive growth in the second quarter of 2009, exiting a severe year-long recession.

The record year-on-year fall stemmed from lower gasoline and other energy costs as well as weak domestic demand, which resulted in lower prices of holiday package tours, consumer electronics and entertainment costs.

Core consumer prices in Tokyo -- a leading indicator released a month earlier than the nationwide figures -- fell by 2.1 percent in September year-on-year, after a drop of 1.9 percent in August, the government said.

This suggests that deflation across Japan "will continue for a while," said JPMorgan Securities economist Miwako Nakamura.

Higher commodity costs and fierce price competition in the shops are making life tough for Japanese companies, many of which took a severe beating from the global economic downturn.

Large drops in durable goods prices and in the education and entertainment sector show that a "price war is intensifying, reflecting weak demand," Credit Suisse economists wrote in a report.

The fear is that the weak corporate sales may cause the jobless rate to rise even higher as firms shed workers, resulting in a vicious circle of lower consumer spending squeezing company earnings, analysts said.

Japan was stuck in such a deflationary spiral for years after its economic bubble burst in the early 1990s and consumer spending has never fully recovered to become a major driver of economic growth.

"Consumers cannot help tightening their purse strings despite the government's earlier stimulus packages," said Araki. "Now that domestic demand is shrinking, the government may need to launch a fresh economic package."

Japan's new centre-left government has vowed to boost household incomes, promising cash allowances for child-raising, a higher minimum wage and other measures including an end to highway tolls.

But it is unclear whether the moves will boost consumer spending. At the same time the latest upsurge in the yen's value is threatening exports, the driving force of the Japanese economy.

The yen hit an eight-month high of 88.25 per dollar on Monday after Japan's Finance Minister Hirohisa Fujii said it would be a "mistake" to artificially weaken the currency to defend exporters.

But it fell back to about 90 per dollar on Tuesday after Fujii appeared to backpedal, describing the yen's recent rise as "a bit too rapid" and leaving open the possibility of action to curb its advance.