Economy back in state of deflation

First official declaration since '06

Kyodo News

Japan is in a state of deflation for the first time in about three years, the government declared Friday, warning that falling prices and a further worsening of employment conditions may hurt the nascent economic recovery.

“Recent price developments show the Japanese economy is in a mild deflationary phase,” the Cabinet Office said in its economic report for November.

That was the first reference to deflation in the government’s monthly economic assessment since August 2006.

As for the overall economy, the Cabinet Office maintained its assessment for the second straight month, saying, “Although the economy has been picking up, it is short of autonomous factors and remains in a difficult situation, such as a high unemployment rate.”

The Democratic Party of Japan-led government showed heightened concern about falling prices in the report as the economy shrank an annualized 0.3 percent in the July-September quarter on a nominal basis.

On a price-adjusted real basis, the economy expanded an annualized 4.8 percent. But nominal figures are said to show an economic picture closer to what people feel in daily life than the price-adjusted real gross domestic product.

Deflation can create a vicious cycle, eroding corporate earnings, causing wages to fall and so chilling consumption.

The nationwide core consumer price index declined seven straight months through September and the Bank of Japan is projecting an annual drop in the core CPI for three years through fiscal 2011.

The government for the first time admitted deflation in its March 2001 monthly economic report and kept the word in for over five years. Even after the government removed it from the report in September 2006, it has never clearly declared an end to deflation.

As for other components of the economy, the government raised its assessment on corporate capital spending for the first time in two months, saying it is “ceasing to fall.”

The report showed a less pessimistic assessment on employment conditions for the first time in 27 months and on bankruptcy levels for the first time in five months.

Looking ahead, the report said the economy is expected to “pick up,” reflecting improvement in the global economy.