Japan Edges Back into Deflation; Jobless Jumps

Japan has edged back into deflation for the first time in more than a year, March figures showed, as joblessness rises, showing the world's No.2 economy faces many problems even as its major manufacturers show signs of stabilizing.

CNBC.com

Analysts expect deflation to accelerate in coming months as the worst global recession in 60 years forces companies to cut prices, on top of sharp falls in commodity prices.

Adding to the pain, Japan's jobless rate jumped to a four-year high of 4.8 percent with the availability of work sinking to a seven-year low with only half as many jobs as applicants.
The Bank of Japan has forecast two years of deflation and Takeshi Minami, chief economist of Norinchukin Research Institute said the price falls will accelerate.

"Deflation will be damaging to the economy. Companies will have difficulty increasing profits, and their effective burden from borrowing money will increase," he said.

"With job conditions worsening, consumption will remain weak. As such, downward pressure from weak demand on consumer prices will continue as a trend."  The core consumer price index, which excludes volatile prices of fresh fruit, vegetables and seafood but not oil prices, dipped 0.1 percent in March from a year earlier. It was the first annual decline since 2007 but a slightly smaller fall than the 0.2 percent slip forecast by economists.

The dollar rose above 99.00 yen for the first time in two weeks as the yen fell across the board after the data, particularly against riskier currencies, in a revival of investor confidence.

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.

The so-called core-core inflation index, which strips out both energy and food prices, similar to the core index used in many other developed countries, fell 0.3 percent.

"As we head into summer, the scale of the fall will increase. Some sort of economic policy will be needed to stimulate consumption. The Bank of Japan may also have to really look into doing something to stop price deflation," said Yoshikiyo Shimamine, chief economist at Dai-Ichi Life Research Institute.

Japan's economic output slumped 3.2 percent in the fourth quarter, and the economy is expected to have contracted even more in the first quarter as companies feel the pain from the global financial crisis.

While tentative signs of recovery have been seen in exports and output -- both rising in March in seasonally adjusted terms -- analysts say companies are still passing on the pain to households through cuts in wages and jobs.

As well, exports are only running at around half the levels of a year ago, even after the March rises.

The unemployment rate jumped to 4.8 percent in March from 4.4 percent in February -- a rise of more than 350,000 people -- potentially putting pressure on the government to act with an election required by later this year.

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"Given severe conditions in the job market and for households, I can't see a scenario of recovery in domestic demand," said Kyohei Morita, chief economist at Barclays Capital Japan.

"Activity in the manufacturing sector may have hit bottom in February and may start rebounding soon, but that would be supported by China this year and by the United States next year, not by domestic demand."

Falling household income is expected to push down consumer prices as companies try to lure consumers into buying their goods by slashing prices, analysts say.

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