Japan Wholesale Prices Slide, Deflation Beckons

Japanese wholesale prices marked their biggest annual fall in nearly six years in February, prompting warnings that Japan faces broader deflation than just the one-off effect of sliding oil prices.

Photo by: Jesse Braun Japanese Yen

In another gloomy sign, core machinery orders fell 3.2 percent in January as companies cut spending in response to a global downturn that is pushing Japan into the worst recession since World War Two.

Wholesale prices fell 1.1 percent in February from a year earlier, accelerating sharply from the 0.3 percent annual drop seen in January.

"Price declines are spreading from materials to other goods, and consumer prices are likely to start falling," said Azusa Kato, an economist at BNP Paribas.

"Japan is likely to enter a mild deflationary period. Other countries may not follow Japan into deflation because their level of inflation was originally much higher than Japan's."

Japan's economy is on course for its longest recession in modern times as a collapse in export demand is prompting companies like Toyota Motor and Sony to slash jobs and scale back investment in factories.

The Nikkei 225 Average gained almost 4 percent in early trade Wednesday, with banking shares rising after Citigroup's chief executive said it was making profits, boosting Wall Street.

But shares are still lurking around 26-year lows and the Japanese government, which has already proposed its biggest budget ever to revive the economy, faces calls from ruling party lawmakers to take additional measures to support growth.

Falling oil and other commodity prices have eased costs for Japanese firms, but have stoked fears that price falls and weak demand could feed each other in a vicious deflationary spiral.

The final price companies charge each other for goods fell 3.1 percent from a year earlier, the largest decline since February 2001. Economists view final prices as a rough guide to likely pressure on prices in stores, and many see consumer inflation turning negative.

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"Wholesale prices will continue to fall toward next year as companies are facing growing pressures to cut prices of consumer goods such as electronic items, heightening the risk of deflation," said Takeshi Minami, chief economist at Norinchukin Research Institute.

The annual slide in wholesale prices was the biggest since June 2003, although it roughly matched economists' median forecast of a 1.2 percent fall.

While the drop in core machinery orders in January was slightly smaller than a median forecast for a 4.5 percent decline, few analysts are optimistic about the outlook for capital spending.

"The pace of decline in core orders was somewhat narrower than expected, but the data still confirmed that companies keep cutting capital spending as their profits deteriorate," Minami said.

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The meltdown of global financial markets has pushed the United States, Japan and the euro zone into recession and slowed growth in China and other emerging economies.

Many economists expect Japan's export-reliant economy to keep shrinking well into this year -- the longest such slide on record -- as manufacturers cut output as global demand plunges.

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