Japan Deflation Deepens

[Ash4781]

http://www.reuters.com/article/bondsNews/idUST28345220090710

TOKYO, July 10 (Reuters) - Japanese wholesale prices fell a

record 6.6 percent in the year to June, as the world's No.2

economy slides deeper into deflation, reinforcing the view that

the Bank of Japan will keep its corporate funding support

measures in place beyond September.

Credit conditions have eased, but debate is likely to heat up

within the BOJ over whether to prolong these special measures to

avoid sending the wrong signal to the markets as the economy

sinks deeper into deflation.

"Even though production is picking up, Japan is saddled with

huge slack in the economy, and this could pose the threat of a

deflationary spiral. The BOJ is likely to continue its current

credit easing steps to combat deflation," said Takeshi Minami,

chief economist at Norinchukin Research Institute.

The fall in the corporate goods price index was bigger than a

median market forecast for a 6.4 percent drop and followed a

revised 5.5 percent slide in the year to May, marking the sixth

straight month of annual declines.

Oil and raw materials price falls were the main culprit, but

weak domestic demand was also to blame as companies curb capital

spending and slash jobs following a record contraction in the

first quarter.

Shorter-term Japanese government bonds rose on Friday pushing

the two-year yield to a 3-1/2-year low JP2YTN=JBTC as

speculation grew that the BOJ may extend its corporate finance

support measures beyond September, although financial markets

took Friday's data in their stride. [JP/]

The BOJ has cut interest rates twice to 0.1 percent in the

wake of the global financial crisis last year and taken steps

like buying commercial paper and corporate bonds and providing

low-interest funds to banks against corporate debt as collateral.

The central bank policy board meets next Monday and Tuesday.

Japanese Economics Minister Yoshimasa Hayashi said he was

concerned about the trend in price changes but that it was too

early to say the country has returned to deflation.

"We have to manage this economy and explain our policies

carefully to make sure concerns about deflation don't become a

reality." [iD:nTKF106462]

SLIDING OFF THE PEAK

Wholesale inflation has evaporated after scaling a 27-year

peak last August, as the global financial crisis sent commodity

prices tumbling.

Reflecting weak demand at home, domestic final goods prices

dropped 2.6 percent in the year to June, the biggest decline

since 2002, pointing to further pressure on consumer prices,

which fell a record 1.1 percent in May from a year earlier.

"As jobs and income conditions deteriorate, consumers are

cutting down on spending while opting to buy low-priced goods.

This is having an impact on price trends," said Taisuke Nakamoto,

an economist at Dai-ichi Life Research Institute.

Nakamoto expected Japanese core consumer prices, which

excludes fresh food but includes oil products, to have fallen 1.7

percent in June from a year earlier.

Wholesale prices have tended to move more sharply than

consumer prices, which fell 1.1 percent in the year to May.

Consumer price data for June will come out at the end of this

month. JPCPI=ECI

For a graphic of Japan's wholesale and consumer prices,

click: here

Underlining the risk of deepening deflation and weakness in

final demand, the government estimates that supply capacity now

exceeds actual demand by 45 trillion yen ($484 billion) a year.

The Bank of Japan and private-sector economists are

forecasting at least two years of deflation.

But while opinions are divided about whether this will be

mild or a more serious slide that prompts consumers to curb

spending, the BOJ says Japan is not facing a deflationary spiral.

Japan's gross domestic product may grow a modest 0.4 percent

in April-June, after a record 3.8 percent decline in the first

quarter, a Reuters poll showed, as companies slowly build output

and government stimulus trickles down. [iD:nLG69853]

But analysts expect any recovery in Japan to be fragile as

many companies slash jobs and cut back on capital spending on

weak domestic demand.

Here we go again.

[interestrateripoff]

If this is our future we are in deep trouble because there is no exit strategy.Japanese lost decade involved the Japanese treading water by exporting and aided by carry trade.

Now effectively the entire planet is in the same position, and even more worryingly in 20 years the Japanese never got the underlying structural economic weaknesses fixed. The zombie banks are still there, in the late 90's the govt deliberately gave loans to people to buy houses knowing full well they would never pay the money back.

Japan is in serious trouble.

[aa3]

Underlining the risk of deepening deflation and weakness in

final demand, the government estimates that supply capacity now

exceeds actual demand by 45 trillion yen ($484 billion) a year.

I'm glad some state is actually starting to look at the supply capacity gap. The only answer is social credit. QE up $484 billion and give each Japanese person a citizen's dividend of $4,000. A family of 4 would get $16,000 extra a year, which would help demand.

So far from what I've seen nations would rather go into a deflationary death spiral, than give their citizens anything though.

[aa3]

If this is our future we are in deep trouble because there is no exit strategy.Japanese lost decade involved the Japanese treading water by exporting and aided by carry trade.

Now effectively the entire planet is in the same position, and even more worryingly in 20 years the Japanese never got the underlying structural economic weaknesses fixed. The zombie banks are still there, in the late 90's the govt deliberately gave loans to people to buy houses knowing full well they would never pay the money back.

Japan is in serious trouble.

Yep you understand it exactly. Our future was always the Japan scenario.. except without a healthy rest of the world to export their surplus capacity to. And without world beating companies who grew massively in the 90's and 2000's.

Edited July 10, 2009 by aa3

[Realistbear]

"When articifially generated credit is sucked out of an assett bubble you get deflation....given the trillions of dollars involved in our present scenario we will probably see global deflation on a scale not seen since the aftermath of the South Sea Bubble bust."

Agree.

[dr ray]

I'm glad some state is actually starting to look at the supply capacity gap. The only answer is social credit. QE up $484 billion and give each Japanese person a citizen's dividend of $4,000. A family of 4 would get $16,000 extra a year, which would help demand.

So far from what I've seen nations would rather go into a deflationary death spiral, than give their citizens anything though.

This has been tried in other counties at various times and it has never worked.

If you give everyone money the nominal price of things immediately goes up. Then the government has to step in to control prices. Once prices are fixed the producers find its not worthwhle continuing and lay people off. Goods become difficult to find.

Pressure is put on the government to supply more capital and the cycle continues until real wealth is taken out of the country

[shedfish]

i can't find the article, but apparently deflation has taken hold in Ireland too

also...

http://www.bloomberg.com/apps/news?pid=206...id=aDtyyGBm8X0A

U.K. Annual Producer Prices Drop by Most Since 2001

[Ruffneck]

Yep you understand it exactly. Our future was always the Japan scenario.. except without a healthy rest of the world to export their surplus capacity to. And without world beating companies who grew massively in the 90's and 2000's.

wrong , we will have hyper inflation

our money is just paper , it is not as good as gold

the banksters only offer of a solution for the past 15 years has been to increase liquidity time and time again

[Guest DissipatedYouthIsValuable]

i can't find the article, but apparently deflation has taken hold in Ireland too

also...

http://www.bloomberg.com/apps/news?pid=206...id=aDtyyGBm8X0A

U.K. Annual Producer Prices Drop by Most Since 2001

But in Ireland the cause is all those people who should have committed suicide for naysaying the economy.

[WiseBear]

"When articifially generated credit is sucked out of an assett bubble you get deflation....given the trillions of dollars involved in our present scenario we will probably see global deflation on a scale not seen since the aftermath of the South Sea Bubble bust."

This is it exactly.

Welcome to the future.