Japan Is on the Brink of Deflation as CPI Stalls

Japanese consumer price inflation has stalled, February figures confirmed, putting the country on the brink of a widely expected return to deflation triggered by a slide in oil prices and a deepening recession.

Lacklustre consumer prices, a barometer for domestic demand, combined with a larger-than-expected fall in February retail sales are yet another sign of gloom as exports, Japan's main engine of growth, evaporate in the face of the global economic slump.

With both domestic and external demand faltering, Japan could be the slowest among major economies to recover from recession and the government faces additional pressure to follow up its budget for the fiscal year starting on April 1, expected to be approved by parliament on Friday, with even more measures to stimulate growth.

"Japan is facing consumer price deflation," said Akira Maekawa, a senior economist at UBS Securities. "We expect CPI to turn negative on-year in March and remain negative for at least the rest of this year due to a combination of weaker energy prices and a deterioration in the output gap. Japanese companies are still producing more than consumers want to buy."

Finance Minister Kaoru Yosano told reporters in a briefing it is still too early to say Japan is in deflation. Many economists expect Japan to face a second bout of deflation, due to the global financial crisis, and the Bank of Japan forecasts two years of falling prices.

Largest Budget Ever

Japanese lawmakers are likely to approve on Friday the government's 88.5 trillion yen ($896.2 billion) budget for the fiscal year starting April 1, the country's largest ever.

This budget and extra stimulus plans for the current fiscal year will bring government stimulus spending to 12 trillion yen since the financial crisis pushed the world's largest economies into recession.

Some lawmakers in Prime Minister Taro Aso's party say the government needs to spend as much as 30 trillion yen in a third stimulus package to stem the worst slump since the 1974 oil shocks.

The yen was flat against the dollar at 98.70 yen, showing little reaction to the price and retail sales data. The flat reading for core annual inflation in February was unchanged from the previous month's figure, which economists had expected to be repeated.

The pace of the annual fall in gasoline prices narrowed, while the pace of rise in food prices excluding fresh food slowed. These factors offset each other, resulting in the flat reading, a government official told reporters.

Annual consumer inflation in Japan has retreated from a decade high of 2.4 percent in July and August last year, with much of the impetus coming from falling prices for oil and other commodities.

Japan's core consumer price index excludes volatile prices of fresh fruit, vegetables and seafood but not oil products.

Highlighting waning confidence in the economy, the Bank of Japan's closely watched tankan survey due on April 1 will likely show sentiment among big manufacturers tumbled 31 points in the first quarter to minus 55, the lowest in almost 34 years, according to a Reuters poll.

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The Japanese economy, mired in its worst recession since World War Two, is forecast to shrink a further 2.5 percent in the first quarter of this year and another 0.4 percent in the second quarter, a Reuters poll shows.

Japanese retail sales fell 5.8 percent in February from a year earlier, a bigger drop than the median market forecast for a 4.0 percent decline, the government said.

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