Japan-Deflation and On set of Recession again?

Troubled signs are in the air once again for the Japanese economy.

Reuters reported on Nov 27 that Japanese consumer price index [excluding volatile food and energy prices] slid in the year to October at the fastest rate since 2001 with increasing signs that weak demand is weighing on prices, while a tumbling dollar adds to price pressures.

This data will put more government pressure for a Bank of Japan policy response to deflation and a possible return to recession.

“Deflation and yen strengthening could significantly damage Japan’s economy, so the government and the Bank of Japan would need to do something,” said Takeshi Minami, chief economist at Norinchukin Research Institute.

The so-called core-core consumer price index, similar to the core index used in the United States, fell 1.1 per cent and matched a record from 2001, the last time Japan slid into deflation, as companies slashed prices of electronics and package tours to lure households to spend.

“It’s hard to judge what the BOJ may do. One option would be for the central bank to announce a commitment to markets that it will keep low rates for some time. That way it can push down money market rates further,” Minami said.

The core consumer price index, which excludes volatile fresh fruit, vegetable and seafood prices but includes oil products, fell 2.2 per cent in October from a year earlier, sliding for an eighth straight month and matching a median market forecast.

The dollar slumped to a 14-year low of 84.82 yen today as investors shunned riskier assets due to concerns about Dubai’s debt problems.

The dollar’s fall may deepen Japan’s woes, hurting exports and deepening deflation by pushing down import prices.

“The yen rise is really picking up recently, and as a result it seems that core CPI prices are probably going to fall by at least 1 per cent on a year/year basis for a while,” said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research Institute.

In a rare positive sign, Japan’s jobless rate fell to 5.1 per cent from 5.3 per cent in October, lower than a median market forecast of 5.4 per cent.

Household spending rose 1.6 per cent in October from a year earlier, more than double the median market forecast for a 0.7 per cent rise.

Japan’s economy grew at the fastest pace in more than two years in the third quarter as stimulus lifted consumer spending and capital spending rose, but analysts say growth will slow as falling wages reduce the lure of subsidies on cars and electronics.

The government said last week the economy was back in deflation for the first time since 2006 in view of slides in consumer prices and nominal GDP, and huge slack in the economy as measured by the GDP gap.

The BOJ has forecast three years of deflation to March 2012 but raised its assessment on the economy to say it is picking up, despite grumbling of the government, which is worried about deflation and another recession in the world’s No.2 economy. — Reuters