Japan faced 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.
The central bank said that its wholesale prices fell by 3.8% in April from a year earlier, the steepest drop in nearly 22 years, 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.
Analysts said that so far, however, the downward pressures are mostly due to falling energy and material costs, which is positive for ailing manufacturers. Mr Hiroshi Watanabe an economist at the Daiwa Institute of Research said that “Japanese companies have struggled to show profits due to high material costs and low product prices. The data show that the Japanese economy is starting to level off, which is a good sign.” He added that another report showed Japan’s core machinery orders fell 1.3% in March from the previous month, much less than expected. The figures follow signs that exports and factory output may have bottomed out.
Mr Kaoru Yosano finance and economy minister said that there were signs that the recession was abating but continued vigilance was needed. He told reporters that “I welcome some signs of easing in the economic slowdown. But we need to remain alert about overall economic conditions.”
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.
Japan’s economy entered recession in the second quarter of 2008 and suffered a brutal annual contraction of 12.1 per cent 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. Japan’s core machinery orders dropped 1.3% in March from the month before.
