Experts warn that Japan isn't out of deflationary woods just yet

Although wholesale prices have logged their highest rise in almost seven years and Japan’s economy logged an annualized growth rate of more than 6 percent in the first quarter, some experts are skeptical that the nation is winning its long battle with deflation.

The experts say the current economic recovery is likely to lose steam in the latter half of this year, and the recovery will not be strong enough to inflate prices in the near future.

“The current economic recovery has peaked,” said Kazuhiko Sano, managing director at Nikko Citigroup Ltd.’s fixed income department.

A major engine of current economic growth — strong capital spending driven by robust exports — is already showing signs of a slowdown, and exports will likely slump next year, he said.

The economies of the United States and China — crucial trade partners for Japan — are likely to slacken due to expected measures by Beijing to cool its overheating economy, and the waning effects of U.S. tax cuts.

Sano expects the consumer price index to stay in negative territory for several more years. The CPI dropped 0.2 percent in fiscal 2003, down for a sixth straight year.

China’s impressive growth and security concerns in the Middle East have lifted prices of oil and other commodities in the global market.

This is reflected in Japanese data. Japan’s domestic corporate goods price index, which tracks trends of prices on goods and materials traded at the wholesale level, rose 1.1 percent in May from a year earlier, the biggest gain since October 1997, the Bank of Japan said Thursday.

On Wednesday, the government said that the nation’s gross domestic product growth for the first three months of 2004 was revised up to 1.5 percent from 1.4 percent. On an annualized basis, this translates into a growth rate of 6.1 percent.

Yet Japan must overcome several hurdles to escape deflation, said Atsushi Nakajima, chief economist at the Mizuho Research Institute.

It will take time before both the corporate and consumer sides confirm that prices will head higher, especially since salaries remain on a downtrend, he said.

“It is sure that downward pressure on prices is easing, but Japan’s deflation is deep-rooted,” Nakajima said.

The government is also cautious in its assessments of the economy.

“The Japanese economy has long been tormented by deflation, and it is good to see bright signs coming from various factors,” Chief Cabinet Secretary Hiroyuki Hosoda told reporters Thursday.

“But we can’t make a quick decision that the economy is on the way out of deflation.”

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