Business / Economy

Deflation fears reignited as pandemic hits consumer prices in Japan

Reuters

Consumer prices in Tokyo fell for the first time in three years in April and national factory activity slumped, data showed Friday, increasing worries the COVID-19 pandemic could tip the country back into deflation.

The darkening outlook in the world’s third-largest economy is already heightening calls for bigger spending, even after parliament approved an extra budget to fund a $1.1 trillion stimulus package to cushion the blow from the still-spreading virus.

“The government will work with the central bank to ensure Japan absolutely does not slip back into deflation,” economic revitalization minister Yasutoshi Nishimura told a news conference Friday.

Core consumer prices in the capital, a leading indicator of nationwide inflation trends, slipped 0.1% in April from a year earlier, government data showed, dashing expectations for a 0.1% rise and following a 0.4% increase in March.

It was the first year-on-year decline since April 2017.

While the drop was largely due to slumping energy costs following the collapse in crude oil price, it consolidated expectations that the nation will see consumer prices fall in coming months as the economy feels a sharper hit from the pandemic.

A separate business survey on Friday confirmed factory activity shrank at its fastest pace in more than a decade in April, as the coronavirus hit output and new orders.

Japan suffered sustained periods of price declines over nearly two decades. Prime Minister Shinzo Abe’s “Abenomics” stimulus policies helped revive parts of the economy in 2013.

Abe has touted an end to deflation as among the key successes of his policies, which included bold monetary easing undertaken by his hand-picked Bank of Japan Governor Haruhiko Kuroda.

But the coronavirus pandemic has taken a heavy economic toll and stoked fears of a return to falling prices.

Many analysts believe the nation is already deep in recession as government requests for citizens to stay home and businesses to shut down chill consumption, while similar curbs elsewhere have triggered a collapse in global trade.

“A sharp deterioration in Japan’s economy is unavoidable, as domestic demand plunges,” said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Shinke expects the economy to have contracted an annualized 4.6% in the January to March period and at least another 20% in the current quarter. BNP Paribas expects an even bigger contraction, of 36.8%, in the April to June period.

Japan is set to release preliminary first-quarter gross domestic product (GDP) data on May 18.

The dismal projections have amplified calls for policymakers to ramp up already massive fiscal and monetary support.

The BOJ boosted monetary stimulus at its policy meeting this week and pledged to flood more money into the ailing economy.

Minutes of the BOJ’s March rate review showed board members voicing concerns about a cash squeeze for small firms, spiking unemployment and a slump in business spending.

“It’s uncertain whether Japan’s economy can make a strong rebound even after the pandemic is contained,” several BOJ board members were quoted as saying at the March meeting.

Kuroda said Thursday the BOJ may hold an emergency meeting before a scheduled rate review in June to set up incentives for financial institutions that boost lending to small firms.

Japan is expected to extend its state of emergency for containing the virus as soon as Monday, public broadcaster NHK reported, even as other countries reopen.

The nation has recorded more than 14,000 confirmed cases of the new coronavirus that causes the respiratory disease COVID-19, and 436 deaths, according to NHK.

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