Japan grapples with deflation, weak investment

Friday, May 15, 2009 at 1:51 AM Posted by Beijing News


Japan faces signs of mounting deflationary pressures and sluggish business investment as the world's number two economy reels from its worst recession since World War II.

Wholesale prices fell 3.8 percent in April from a year earlier, the steepest drop in nearly 22 years, the central bank said, raising concerns that Asia's biggest economy is slipping into another bout of deflation.

Consumer price inflation turned negative in March for the first time in 18 months and the fear is that Japan may see a repeat of its 1990s deflationary spiral when falling prices led to weak consumer spending.

So far, however, the downward pressures are mostly due to falling energy and material costs, which is positive for ailing manufacturers, analysts said.

"Japanese companies have struggled to show profits due to high material costs and low product prices," said Hiroshi Watanabe, an economist at the Daiwa Institute of Research.

"The data show that the Japanese economy is starting to level off, which is a good sign," he added.

Another report showed Japan's core machinery orders fell 1.3 percent in March from the previous month, much less than expected. The figures follow signs that exports and factory output may have bottomed out.

Finance and Economy Minister Kaoru Yosano said there were signs that the recession was abating but continued vigilance was needed.

"I welcome some signs of easing in the economic slowdown. But we need to remain alert about overall economic conditions," he told reporters.

Japan's economy has been battered by a slump in exports that has prompted its corporate giants to slash production and business investment to cope with massive losses.

Analysts said the slowing pace of the decline in machinery orders was good news but firms are likely to remain cautious about spending money on new plants and equipment while they are in the red.

Factory output rebounded for the first time in six months in March and is expected to keep rising in April and May, the government said last month.

But "moves by companies to cut capital spending may drag down a recovery for manufacturers," warned Naoki Murakami, chief economist at Monex Inc.

Japan's economy entered recession in the second quarter of 2008 and suffered a brutal annual contraction of 12.1 percent in the last three months of the year. Analysts say the first quarter of 2009 was probably even worse.

But recent data have suggested exports may be bottoming out, even if prospects for a full-fledged recovery appear dim while the global economy remains weak given Japan's heavy dependence on foreign markets.

-- Dow Jones Newswires contributed to this story --





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