Japan Deflation Moderates, Unemployment Falls, Signaling Recovery Intact

Japan’s deflation moderated and the unemployment rate fell, indicating the nation’s recovery remains intact as policy makers consider stimulus measures to protect the economy from a strengthening yen.

Consumer prices excluding fresh food slid 1 percent in August from a year earlier after falling 1.1 percent in July, the statistics bureau said today in Tokyo. The jobless rate dropped to 5.1 percent from 5.2 percent, while the number of people no longer in the labor force increased, it said.

Today’s reports show little sign that the yen’s climb to a 15-year high against the dollar has hurt the domestic economy so far, a contrast with data yesterday showing industrial production unexpectedly slid. The Bank of Japan meets next week to consider whether to expand a credit program and Prime Minister Naoto Kan is compiling stimulus to shore up growth.

“Employment lags behind the current state of the economy, so today’s improvement in the jobless rate reflects the firmness in the economy in the first half of this year,” said Mika Ikeda, an economist at Nomura Securities Co. in Tokyo. Even so, “deflation still persists in Japan.”

Intervention Warning

Highlighting the Japanese government’s concern about an appreciating currency, Prime Minister Naoto Kan said that Japan is ready to resume intervening after selling yen for the first time in six years last month. “We will continue to take decisive measures as needed” on the yen, Kan said today in a policy speech in parliament.

The yen traded at 83.46 per dollar at 2:31 p.m. in Tokyo from 83.54 before the consumer price report was published. It has risen about 5 percent in the past three months. The Nikkei 225 Stock Average was 0.8 percent higher.

The stronger yen prompted Nintendo Co., the world’s biggest maker of video-game machines, to cut its annual net profit forecast by 55 percent to 90 billion yen earlier this week. Murata Manufacturing Co., an electronics components maker, will eliminate 3,000 temporary positions and increase production overseas as the yen’s strength forces it to reduce costs, President Tsuneo Murata said this week.

The 1 percent decline in August’s consumer price index, the 18th straight drop, matched the median estimate of 24 economists surveyed by Bloomberg News.

Consumer Sentiment

A separate report from the Bank of Japan today showed that sentiment among Japanese consumers worsened in September for the first time in six quarters and more people said they expect prices to drop in a year from now.

The yen’s advance has lowered import costs and Japan’s biggest retailers have cut prices, increasing deflationary pressure, said economist Mari Iwashita. The Bank of Japan will likely respond to the rising yen by expanding its 30- trillion yen ($360 billion) lending facility on Oct. 5, 14 of 17 economists surveyed by Bloomberg News said.

“Moves by retailers to take advantage of the yen’s gain are spreading, putting renewed downward pressure on consumer prices,” Iwashita, chief market economist at Nikko Cordial Securities in Tokyo, said before the report. “The pace of core prices declines have eased in recent months, but their drops may resume worsening.”

Retailers including supermarket operator Daiei Inc. and Ryohin Keikaku Co., which operates Mujirushi Ryohin stores, have announced plans to cut prices.

Shrinking Growth

The yen’s strength has weighed on Japan’s export-reliant economy, which expanded at less than half the pace in the April-June period compared with the previous quarter. Reports this week showed overseas shipments grew at the slowest pace this year in August, industrial production unexpectedly declined for a third month and gains in retail sales were smaller than economists forecast.

A slowdown in economic growth may threaten the Bank of Japan’s forecast that core prices will stop falling in the year starting April 2011. The bank’s board predicted core prices will rise 0.1 percent in the next fiscal year after falling 0.4 percent this year. It will update forecasts at an Oct. 28 meeting.

“It’s unlikely the consumer price index is going to turn positive this fiscal year or next in an environment like this,” said Yoshimasa Maruyama, a senior economist at Itochu Corp. in Tokyo. “Households are looking for cheaper products, and companies have little pricing power, resulting in a pricing war.”

Fed Policy

The U.S. economy is also threatened by falling prices. The Federal Reserve last month said for the first time that too-low inflation, in addition to sluggish growth, would warrant its taking action, as it moved closer to a second wave of unconventional monetary easing.

Depending on whether the yen continues appreciating and the economy keeps weakening, BOJ Governor Masaaki Shirakawa and his board colleagues might have to consider more loosening of credit even after possibly increasing the 30- trillion yen credit program for lenders next week, economist Hiroaki Muto said.

“With global growth slowing, an end of deflation is being put off further and further, and that means pressure on the BOJ to do more will linger,” said Muto, a senior economist at Sumitomo Mitsui Asset and Management Co. in Tokyo.

Job Market

In a sign that decelerating economic growth is discouraging people from looking for work, the number of people no longer in the labor force increased by 90,000 in August from July, the employment report showed.

“The pace of improvements in the job market won’t pick up for the next year,” said Itochu’s Maruyama. “With the yen’s strength, companies are likely to expand production overseas, so they’re not ready to hire meaningfully at home.”

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Aki Ito in Tokyo at aito16@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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