Monday April 20, 6:31 am Eastern Time
FOCUS-Japan data raises fear of deflation spiral
(Adds comments from Bank of Japan officials)
By Andrew Morse
TOKYO, April 20 (Reuters) - Finally, things are moving in Japan's economy. Unfortunately, they're going in the wrong direction.
Data released by the Bank of Japan on Monday showed clear evidence that deflation, the phenomenon of falling prices that erodes corporate profitability, is spreading through the world's second-largest economy.
BOJ officials, meeting in Tokyo later on Monday, downplayed concerns over the possibility the country was going into a deflationary spiral, which some define as an uncontrolled fall in prices caused by overcapacity.
''I think it is too early to debate whether we are in a deflationary spiral,'' Eiichiro Kinoshita, manager of the central bank's Osaka branch told reporters. ''Business investment hasn't become greatly excessive, and large companies are not in a full-fledged reduction of jobs. I think it is an exaggeration to say a classic deflationary spiral has begun.'' The numbers, however, aren't reassuring.
The domestic wholesale price index for the first 10 days of April showed prices falling 2.1 percent from the same period a year earlier. Import prices, which fell in yen terms as the currencies of Asia plunged in the wake of a regional economic crisis, collapsed a jaw-dropping 7.4 percent.
''Japan is teetering on the verge of a deflationary spiral,'' said Andrew Shipley, economist at Schroder Securities Japan Ltd. He says that much of the fall in prices is coming in the form of cheaper imports from Asia.
Deflation is particularly ravaging to companies as they slash prices to stay competitive with their rivals, a phenomenon the cheaper Asian imports exacerbates.
Economists and market participants say the data is a particularly telling indication of the propensity toward dropping prices in what is considered one of the priciest countries in the world. That's because the data is the first to compare prices from two periods after Japan's sales tax was raised on April 1, 1997.
The tax hike, some economists say, artificially camouflaged falling prices. It also dampened consumer willingness to spend, prompting some companies to cut prices, they say.
''All these numbers from here on out are going to take on greater significance,'' said Michael Wilkins, a dealer at Credit Lyonnais. ''If the numbers don't improve on a year-on-year basis, it means consumption is continuing at depressed levels.''
Japan's financial markets had mixed reactions to the report.
The yield on the benchmark 182nd government bond temporarily slid below 1.5 percent, while key June futures rose to within 20 ticks of its all-time high. Falling prices improve the buying power of bonds' fixed payments.
''You can see the concern about deflation when bond yields get this low,'' said Jun Fukashiro, a fund manager at NCB Investment Management.
Both stocks and the yen slipped, but traders in those markets said they were more concerned about the contents of Japan's economic stimulus package expected out later week.
The situation isn't seen getting better anytime soon. Wholesale prices are expected to fall an average 1.4 percent in the fiscal year that started on April 1, according to a survey of 24 economists surveyed in a Reuters poll released last Thursday.
''Spiral is probably too strong a word, because the government is coming up with enough stimulus to stop a spiral,'' said Robert Feldman, chief economist for Japan at Morgan Stanley. ''A spiral implies an accelerated deflation and I don't think that will happen,'' he said.
But given Japan's asset deflation, demand deflation due partly to falling business investment and supply-side deflation from technological innovation, ''there is pretty heavy deflationary pressure,'' Feldman said.
Economists say Japan's policymakers have few options left. Interest rates are already at historic lows and have yet to spur the economy.
''The fact that deflation is picking up steam makes it harder for the Bank of Japan to change its hyper-accommodative policy,'' said Schroder's Shipley. But he says cutting the official discount rate - now at 0.5 percent - would only be a sign of capitulation. |
