Japanese deflation worries grow

Friday 28 August 2009 08.17
Japanese prices - Deflation more pervasive?
Japanese prices - Deflation more pervasive?

Japanese core consumer prices fell at the fastest annual pace on record in July, potentially putting pressure on a reluctant Bank of Japan to rein in deepening deflation.

The jobless rate also hit a record high 5.7% ahead of Sunday's election, which the opposition Democratic Party looks set to win.

Core consumer prices, which exclude volatile fresh food prices but include oil costs, fell 2.2% in the year to July.

Analysts believe, however, that the BOJ is unlikely to revert to full-blown quantitative easing and flood the banking system with excess cash as long as price falls narrow in the months ahead, as it does not believe deflation is likely to spiral out of control.

But in a sign that deflation is becoming more pervasive, the so-called core-core consumer price index, which strips out food and energy costs, marked its biggest annual fall in seven years - 0.9%.

The BOJ is already forecasting two years of deflation and is likely to extend that to three when it issues its twice-yearly outlook report in October.

The bank has said there is no need to act unless the economy falls into a deflationary spiral, in which expectations of price declines so undermine demand that companies cut prices to below cost and cover their losses by slashing jobs and wages, making consumers even less willing to spend.

Japan's economy returned to growth in the second quarter of this year, pulling out of its longest post-war recession, but analysts warn of a rocky road ahead as the recovery was based on short-term stimulus efforts around the world.