Japan CPI Falls At Record Pace.

Deflation is not only here it is accelerating and bringing with it the much missed affordability. The big hope now is tha the benign force of deflation will be spreading to food and medical services CPI components to make lives of ordinary people even more affordable.

Japan has had a two decades experience with real prices stability, also known as deflation. See when the privately owned US Federal Reserve inflates money supply they erode both wages and savings – that is no price stability. That is criminality. But eventually the laws of physics take over and the privately owned FED is powerless to stop it.

Wall Street Journal. July 31, 2009.

Japan CPI Falls At Record Pace,Unemployment Rises.

TOKYO (Dow Jones)–Japan’s core consumer price index fell at its fastest pace on record for the second straight month in June, while the jobless rate rose to near its all-time high, troubling trends that economists say could complicate any economic recovery.

The data cast a shadow on better news, with Japan’s benchmark Nikkei 225 Stock Average closing at 10,356.83, its highest finish in almost ten months. Other recent indicators have also shown the corporate sector appearing to get in better shape as Japan’s export markets recover and firms increase production.

But falling prices and increasing unemployment are likely to worsen in the months ahead, and those could hurt the overall economy, analysts say.

The core CPI, which excludes volatile fresh food prices, fell 1.7% on year in June, surpassing the 1.1% slide in May, the Ministry of Internal Affairs and Communications said Friday. Core prices have now fallen for four straight months.

The result is likely to fuel concerns that the world’s second biggest economy is headed for deflation, a prolonged period of damaging price falls, just three years after emerging from the last such period.

Sharply lower oil and other energy prices, which were shooting up last summer, were the main factor in the fall. As those prices peaked in August last year, “assuming the prices of other goods stay at current levels, the on-year fall-off will get even bigger in July and August,” said an internal affairs ministry official briefing reporters.

But other products’ prices are also expected to drop as retailers slash prices to encourage recession-wary consumers to spend. Some economists think prices in Japan could continue falling for several years.

“We think the core CPI will fall to minus 2.0% by October, and keep falling by around 1.0% until at least 2011,” said Azusa Kato, an economist at BNP Paribas. “Even after the effect from the fall-off of energy prices fades after August, the fundamental problem of the large supply-demand gap will persist, and continue pressuring prices down.”

By making consumers more reluctant to spend, the rising jobless rate will only exacerbate the deflation, which will increase the real debt burdens of the government and firms just as they struggle with tumbling profits. That could feed into a vicious cycle where companies are forced to lay off more workers, analysts said.

The jobless rate rose to 5.4% in June, its highest level since June 2003, and just shy of its post-war record-high of 5.5%. The result was worse than the 5.3% expected by economists, and suggests even greater employment woes to come, economists said.

Meanwhile, the jobs-to-applicants ratio fell to a record-low of 0.43, meaning there are only 43 job openings for every 100 applicants.

“It is inevitable that the jobless rate will keep rising this year,” said Norio Miyagawa, an economist at Shinko Research Institute. “It may go above 6% towards the year end.”

Other economists echoed that view. “Firms have either to cut labor costs or to raise earnings, and given how bad things are on the earnings front, they’re certainly in no position to do the latter,” said BNP Paribas’ Kato.

Meanwhile, a slight rise, of 0.2% on year, in household spending in June offered little consolation, analysts said. The rise was due largely to the one-off effects of government purchase incentives for eco-friendly cars, tvs and other products, they said.

“The employment situation is getting even worse, so until it turns around, we can’t expect any real recovery in consumption,” another ministry official briefing reporters said.

Housing and construction data Friday also revealed further weakening in Japan’s domestic demand, which makes up more than half of the country’s economy. Housing starts plunged 32.4% on year, while construction orders dropped 28.0%, data from the Ministry of Land, Infrastructure and Transport showed.

Deteriorating domestic demand bodes poorly for further price falls, which other data also suggested could get worse ahead.

The core figure for the Tokyo metropolitan area, considered a leading indicator for nationwide price trends, dropped 1.7% from a year ago, matching the 1.7% fall expected by economists.

If Japan’s opposition Democratic Party topples the long-ruling Liberal Democratic Party from power in Lower House elections on August 30, as polls suggest it is likely to do, that could lead to even lower prices, analysts said. Plans to abolish the gasoline tax in fiscal 2010, for example, “could lower core CPI by around 0.5ppt,” wrote UBS Securities senior economist Takuji Aida. “Because of the emphasis on household sector-friendly measures, the DPJ’s policies would be inclined to put downward pressure on prices.”

Other economists echoed that outlook, but said it would not necessarily be negative for prices in the long-run.

“While it’s not our main scenario, because we think unless the DPJ wins an overwhelming victory it may have trouble implementing its pledges quickly, any DPJ win could push prices down a lot in 2010,” said BNP Paribas’ Kato.

While these policies could in the near-term contribute to deflation, she said, if they succeed in stimulating consumption that could eventually help tame price falls.


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