Hopes for recovery in the Japanese economy were dented today as data showed wholesale price falls at their sharpest in over 22 years, signalling a return to deflation, while machine orders also dived.
Core machinery orders - a key gauge of business activity - fell 5.4% month-on-month in April, far worse than the average forecast of a 0.8% increase.
Meanwhile, Japanese wholesale prices dived 5.4% in May from a year earlier - the biggest drop since March 1987 when prices also tumbled 5.4% - and worse than a market forecast of a 5.1% fall.
It was the fifth month in a row of year-on-year declines and steeper than a revised 4% drop in April.
The data raised fears Japan will fall back into deflation, a decline in prices that hurts companies and leads consumers to delay spending in hopes of further price drops, dampening economic activity.
The country was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, leaving it mired in a long recession and prompting the central bank to slash interest rates to almost zero.
But Bank of Japan Governor Masaaki Shirakawa said key economic indicators - such as industrial output and gross domestic product - would likely improve in the second quarter.
The central bank at its May policy-setting meeting upgraded its overall economic assessment for the first time in nearly three years, saying that Japan's 'exports and production are beginning to level out.'
The world's number two economy has been hit hard by the global downturn that has cut deep into its car, electronics and other exports, driving up unemployment at home and depressing prices.
Prices have also been pushed down because global energy costs have fallen from their highs of a year ago. Crude oil prices hit a record near $147 a barrel last July but plummeted as the global crisis set in, falling back to around $30 earlier this year.
Prices have begun to recover but only broke back above the $70 barrier again yesterday.
A Bank of Japan official noted that corporate goods prices also fell month-on-month, by 0.4%, the ninth month of such declines in a row, indicating Japan's worst post-war recession was also driving down prices.
The official said that even though commodity prices have been recovering, the domestic economy is so weak that companies can not raise their prices.
