Deflation Deepens as Japan Contraction Risk Intensifies: Economy
Japan’s consumer prices slid at a faster pace in July and industrial production unexpectedly slumped, raising the danger that the world’s third-largest economy has slipped back into a contraction.
The benchmark price gauge, which excludes fresh food, fell 0.3 percent in July from a year before, putting the central bank’s 1 percent inflation goal further from reach, a government report showed in Tokyo. Industrial output fell 1.2 percent. A private measure of manufacturing for August was the lowest since the aftermath of the record March 2011 earthquake.
Today’s releases reflect diminishing demand overseas for the nation’s exports amid the European crisis and exchange-rate appreciation, and the end of incentives for vehicle purchases. With Prime Minister Yoshihiko Noda’s government today predicting it will miss a deficit-reduction target, pressure may rise on the Bank of Japan (8301) to expand stimulus and sustain the recovery.
“The risk of a contraction in the second half of the year is increasing,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who previously worked at the Bank of Japan. “The downside risks on the economy are increasing, and could push the BOJ to further expand its asset- purchase program next month.”
The Nikkei 225 (NKY) Stock Average headed for a second straight week of declines, and closed down 1.6 percent in Tokyo. The yen was at 78.54 per dollar, about 4 percent from its postwar high reached in October 2011. The currency has soared 47 percent in the past five years.
The jobless rate was unchanged at 4.3 percent in July, a government report showed today.
The slide in output was led by declines in the electronic components sector, with production of integrated circuits for mobile phones and video game consoles in Asia declining, the government said. The trade ministry’s assessment that production is “flat” remained unchanged from last month.
“The most shocking data was production,” said Norio Miyagawa, a senior economist at Mizuho Securities Research and Consulting Co. in Tokyo. The central bank may need to bolster stimulus as the economy faces a deeper-than-expected slowdown, Miyagawa said.
Japan’s weakening accompanies signs of slowing across Asia, the region that’s led the global rebound from the 2007-2009 credit crunch. South Korea today reported a 1.6 percent drop in industrial production in July from the previous month, after a 0.6 percent decline in June.
The decline in output makes a Bank of Korea interest-rate cut likely in September, said Lee Sang Jae, a Seoul-based economist at Hyundai Securities Co.
India, Asia’s third-largest economy, reported that its gross domestic product increased 5.5 percent last quarter from a year before. While the expansion beat economists’ estimates after the central bank cut interest rates to support spending, it may fail to ease pressure on Prime Minister Manmohan Singh to revive a development agenda hampered by graft allegations and political gridlock, as price pressures limit the central bank’s room to cut rates further.
In Europe, German retail sales fell in July. House prices in the U.K. rose this month from a month ago after declines in June and July. The European Commission releases a report projected to show unemployment in the region rose to a record 11.3 percent in July, according to a Bloomberg survey.
In the U.S., a Supply Management-Chicago Inc. index of business activity probably showed a slower expansion in August than a month earlier, while the Thomson Reuters/University of Michigan’s final reading on consumer sentiment probably showed no change from a preliminary reading of 73.6, according to surveys of economists.
In Japan, a manufacturing purchasing managers’ index slipped to 47.7 in August, the lowest level since April 2011, according to Markit Economics. A reading below 50 indicates a contraction.
The economic deterioration adds to challenges facing Noda, who is facing pressure from the largest opposition party to follow through on a pledge to hold an early election, and whose party holds a leadership contest next month. The government this week downgraded its economic assessment for the first time in 10 months, citing weakness in global demand a week after a report showed exports fell the most in six months in July.
Today, Noda’s administration reported that the primary budget deficit -- which excludes payments on debt -- will be 2.8 percent of GDP in the 2020 fiscal year, short of the targeted surplus, even if a sales-tax increase enacted this year is phased in as planned.
Noda is also wrangling with lawmakers to get approval of a deficit-financing bill that the government needs to cover its shortfall. Finance Minister Jun Azumi told reporters in Tokyo that spending cuts may come if passage is delayed.
Such a move would add to drags on the economy. About 88 percent of the 300 billion yen ($3.8 billion) budgeted for car- purchase subsidies has been consumed, damping the outlook for the industry. After surging about 53 percent in the first seven months of 2012, Japan’s vehicle sales may drop as much as 20 percent next quarter, according to analysts at BNP Paribas SA and HIS Automotive.
Nissan Motor Co. (7201), Japan’s second-largest automaker, has repeatedly called on the government to extend subsidies and is introducing the new Note compact and the Serena S-hybrid minivan to spur demand.
“This Japanese market needs stimulus to continue to grow and compete on the world stage,” Andy Palmer, executive vice president at Nissan, told reporters in Yokohama, Japan, at a July 17 event to introduce the new Note. “We sincerely hope those kind of incentives will be continuing.”
The 1.2 percent decline in industrial output last month compared with the median estimate for a 1.7 percent gain in a Bloomberg survey of 27 economists.
“We will have to revise down our GDP forecast for the third quarter” based on today’s data, said Nishioka at RBS, who had previously seen a 2.1 percent annualized expansion. JPMorgan Chase & Co. and BNP Paribas SA are among banks that had predicted a drop in GDP even before today’s figures.
A decline in oil prices from a year earlier was the main reason for the weaker consumer-price reading, Yoshiki Shinke, chief economist at Dai-Ichi Life Research Institute in Tokyo, wrote in a report before today’s release. Japan has increased reliance on fossil-fuel imports after mothballing almost all its nuclear power after the post-tsunami Fukushima reactor meltdown.
Currency strength, spurred by Japan’s status as a haven from global market turmoil because of its being the world’s largest net creditor, also has toughened the BOJ’s job of defeating the deflation that became entrenched in the economy in the late 1990s. Exchange-rate gains cut the cost of imports.
The yen slid as much as 8.8 percent against the dollar in the weeks after the BOJ shocked markets in February by announcing a 1 percent inflation target and expanding its asset- buying fund. The relief for exporters was fleeting, as the central bank refrained from expanding stimulus since April and the currency resumed its climb toward a postwar record.
“Japan is still in a deflationary phase,” Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch, said before today’s release. “The bad news is that the global slowdown has been prolonged so the BOJ will probably have to delay its time line to achieve the inflation goal.”
BOJ Governor Masaaki Shirakawa said as recently as a week ago that the consumer price index will “gradually rise to a range of above 0.5 percent” toward the end of the fiscal year that starts April 1, 2013. “Thereafter, it will likely be not too long” before it reaches the BOJ’s 1 percent goal, he said.
By then, Shirakawa’s term at the BOJ’s helm will have been over by more than a year.
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