Record price tumble sparks deflation fears

Kyodo News

Prices in Japan tumbled at a record pace in August, intensifying concerns that deflation could undermine the fragile economic recovery.

The key consumer price index, which excludes volatile fresh food prices, fell 2.4 percent from a year earlier amid rising unemployment and falling wages, the government said Tuesday. The figure marks the steepest decline since officials began compiling comparable data in 1971.

The result matched the average market forecast in a Kyodo News survey.

Core CPI has now dropped for six straight months and suggests that the economy could face another bout of prolonged deflation.

The core CPI for Tokyo retreated 2.1 percent in September, according to the statistics bureau. The result suggests that prices nationwide are headed further south. Prices in the capital are considered a leading barometer of price trends across Japan.

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.

Japan underwent a destabilizing bout of deflation during the 1990s and again earlier this decade. The country emerged from a yearlong recession in the April-June quarter, but the economy remains weak.

The Bank of Japan said last month that while some indicators show recovery, companies and consumers are still reluctant to spend. Economists expect the unemployment rate to surpass a record high of 5.7 percent hit in July.

Tetsufumi Yamakawa, chief Japan economist for Goldman Sachs, said in a recent report that it sees “no end to the vicious spiral leading from price decline to wage decline.”

The big drop over the last few months stems mainly from lower oil prices, which are down more than 50 percent from last year. But the latest figures reveal that the downtrend now extends to other categories, including clothes, household goods and recreation.

So-called “core-core CPI” excluding fresh food and energy fell 0.9 percent on year.

Seeking to lure reluctant consumers at home and abroad, Japanese companies are lowering prices.

Nintendo Co. announced plans last week to slash the price of its Wii in Japan and the U.S. by 20 percent to spur sales heading into the critical holiday shopping season.

Sony Corp. announced a price cut in Japan for its PlayStation Portable model called the PSP-3000 by 15 percent to ¥16,800 from ¥19,800 starting Thursday. The latest reductions follow similar moves by Sony for its home console PlayStation 3.

Boosting domestic demand is a top priority for the new administration. Prime Minister Yukio Hatoyama’s Democratic Party of Japan has promised cash handouts to families with children, toll-free highways and income supplements for farmers.

Policymakers will get a more complete reading of the economic health soon with key indicators due out later this week.

The government will release August industrial production figures Wednesday and labor market statistics Friday. The BOJ’s closely watched “tankan” survey is scheduled for Thursday.