Deflation fears spread in Japan after consumer prices fall at record pace

Record fall in Japan prices fuel deflation fears
Deflation fears spread in Japan after consumer prices fall at record pace

TOKYO (AP) -- Deflation is clawing its way back in Japan, and that's not good news for an economy trying to recover from its worst recession since World War II.

Japan's key consumer price index tumbled at a record pace in May, the government said Friday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline.

The result marked the biggest fall since the government began releasing comparable data in 1971.

Japan appears to be "heading for another lengthy period of deflation," said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

Lower prices may seem like a good thing, but deflation can hamper growth by depressing company profits and causing consumers to postpone purchases, leading to production and wage cuts. It can also increase debt burdens.

The drop in underlying prices is "set to be persistent" and can lead to various problems for companies and individuals because interest rates will "be too high for prevailing economic conditions," Jerram said in a note to clients.

Japan underwent a destabilizing bout of deflation during the 1990s, and again earlier this decade, when the world's second-largest economy struggled to escape from a real estate and banking crisis.

After the results, Japan's finance minister Kaoru Yosano expressed concerns about a significant slowdown in demand.
"We continue to monitor price movements, and need to carefully implement economic management to avoid...a deflationary spiral," Yosano said at a news conference, according to Kyodo news agency.
With crude oil prices down dramatically from record highs a year earlier, energy and transportation prices fell sharply in May. Fuel, light and water charges were down 3 percent, and private transportation costs tumbled 9.2 percent.
But analysts point to the 0.5 percent decline in so-called "core-core CPI," which excludes food and energy, as a more troubling sign of weakness in underlying prices.
Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.
The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation's capital are considered a leading barometer of price trends across Japan.
"This is consistent with media reports that large supermarkets are marking such goods down as households turn increasingly defensive amid severe employment and income conditions," said Kyohei Morita, chief economist at Barclays Capital in Tokyo.
Japan's central bank predicts that prices will keep falling for at least two years. In its latest economic outlook report in May, it forecast core CPI to drop 1.5 percent this fiscal year ending March 2010 and another 1 percent the following year.

Consumer, production prices continue to drop in China

Consumer, production prices continue to drop

Consumer, production prices continue to drop by -- CHINA'S consumer and production prices continued to decrease in May as expected, which allowed the central bank to retain low interest rates.

Analysts anticipate the deflation will extend into August and some...

Do expansive federal bailout plans doom Americans to an inflationary future?

The $7 trillion question

For now, frightened investors worldwide continue to gobble up U.S. Treasury bonds, and they aren't much concerned about the impact of all the obligations the U.S. government is taking on to try and head off economic catastrophe.
But the government printing money, lending money to shaky corporations and guaranteeing debt that may never be repaid all could have troubling consequences in the not-too-distant future.

Focus on deflation
Even those who have backed the blizzard of emergency spending on the grounds that it's necessary to prevent an economic catastrophe are worried about the size of the tab that will be left to taxpayers.
An inflationary spike may seem unlikely, given that governments around the world are currently doing their best to head off the opposite threat - deflation, with falling price levels that would hamper economic growth by increasing real interest rates. The Bank of England and the European Central Bank slashed interest rates Thursday morning in a bid to bolster economic activity and prevent inflation from turning sharply negative in coming months. Read more from CNN Money...

Nouriel Roubini Says, 2009 Recession Will Be Severe: ' There Is a Global Deflationary Risk,'

2008 From Inflation to Deflation

Economy: From Inflation to Deflation
Stock Market: Sell Hope, Buy Despair

Outside the Box: Five Potential Surprises into Year-End

The Face of Deflation
John Riley
For the past couple of years, the Fed and Wall Street have been denying the existence of deflation. Deflation is the worst economic scenario, so it is no surprise that they turn a blind eye publicly even when they are furiously working behind the scenes to prevent it and control it.
One of the ways of denying deflation is to strictly define it only as "a pervasive and constant price decline in all areas of the economy caused by a reduction in credit available or the money supply." While this is one definition, it is not the only definition.
Deflation starts out in the corporate area with a deflation of profits. It then goes to revenues and lastly causes price declines. We have already seen profit deflation and revenue deflation and some industries are experiencing price deflation.


We must start thinking like South American dictators (From The Guardian)
An economy on the brink of deflation needs to jettison the orthodoxies of prudence - in favour of a licence to print money
Deflation and depression are closely related. This week the UK has reported the sharpest drop in producer prices since the series began in 1975, and unemployment has reached an 11-year high with the largest jump in claimants since 1992. The Bank of England is forecasting a severe recession similar to the one that hit the Scandinavian economies after their banking collapses of the early 1990s. This, and the collapse in commodity prices, makes it likely that consumer price inflation will disappear completely before the middle of 2009. If economies weaken only a little further than now feared, then we will experience deflation. Yesterday's consumer price forecast from the Bank of England suggests this is entirely feasible - as Mervyn King, the bank's governor suggests this is entirely feasible - as Mervyn King, the bank's governor, admitted.

More about Deflation: Sense and nonsense about Deflation

Fed plans another rate cut before Christmas, probably 0.5 %

Due to the deteriorating retail sales and rising unemployment, Bernake hints at another rate cut before Christmas.
European Central Bank President Jean-Claude Trichet calls the current measures a work in porogress. The Bank of England and the ECB have some room for a 50% basis points rate cut before Christmas. But Bernanke is a a bit running out of steam to manœver, and a 0,25% base rate cut won't help very much.
Are we going to see a repeat of the Bank of Japan scenario, a deflation?

Bernanke leaves door open to another rate cut, warns markets remain under 'severe strain'