Saturday, February 4, 2012

Deflation Persists

Japan's core consumer prices fell for the third consecutive month in the year to December, and mild deflation is expected to persist this year as energy prices stabilize and worries about Europe's debt crisis suppress wage growth and economic activity.

Core consumer prices declined an annual 0.1 percent, matching the median estimate, and a narrower measure that excludes both food and energy also fell in a sign that Japan continues to grapple with a strong yen, which pushes down import prices and makes exporters reluctant to raise salaries.

Retail sales fell 1.2 pct in 2011, the first fall in two years, and auto and machinery equipment sales posted record falls in the series, which dates back to 1980. But sales rose an annual 2.5 percent in December, the biggest increase in 16 months.

The Bank of Japan and the government concede that the economy is in a lull, and they could come under increasing pressure to support it with currency intervention and monetary policy easing as Europe's debt crisis weighs on external demand.

Europe's downturn could offset the economic benefits of rebuilding the country's earthquake-damaged northeast coast.

"The stagnation of other developed countries is likely to push back the timing of Japan beating deflation from the mid-2010s as originally thought to the late 2010s," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"The BOJ will need to keep its ultra-easy stance in the meantime. If risks from the euro-zone debt crisis heighten, it could move for an additional easing in the near term."

Japan's core consumer price index (CPI) includes oil products but excludes volatile prices of fresh fruit, vegetables and seafood.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, fell 1.1 percent in the year to December.

Core consumer prices in Tokyo, available a month before the nationwide data, fell 0.4 percent in the year to January. That compares with the median estimate for a 0.3 percent annual decline.

Annual data showed the core CPI slipped 0.3 percent in 2011, the third straight yearly fall. Japan's consumer inflation has been around zero or minus for over a decade, except a 1.5 percent rise in 2008 on the back of an increase in energy prices.

"Overall consumption is relatively firm partly supported by reconstruction demand. But it is hard to expect to see a self-sustainable recovery in private spending," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

"With uncertainty about the economic outlook and lackluster wage growth, consumers are unlikely to boost spending."

Nippon Keidanren, the country's largest business lobby, cited this week uncertainty about energy, the strong yen and a manufacturing shift overseas as reasons why pay raises are out of the question in annual labor union negotiations in the spring.

Japan's economy will likely show a mild contraction in the fiscal year ending in March but is expected to rebound next fiscal year, supported by reconstruction demand after the March 2011 earthquake.
Reconstruction could help narrow the gap between supply and demand but won't be enough to inflate demand in excess of supply and bring about an end to deflation, economists say.

Some Bank of Japan board members see a slight delay in post-quake reconstruction demand, and the global slowdown is somewhat more acute than previously thought, minutes of the central bank's December 20-21 meeting showed on Friday.

No comments:

Post a Comment