Japan Falters as Ito Calls for Euro Buys to Rein in Yen

Japan Consumer Prices Fall 0.2% in Sign of Deflation Struggle
A slowing global economy is clouding Japan’s growth prospects by weakening overseas demand for goods from cars to televisions just as a strengthening yen reduces profits. Photographer: Kiyoshi Ota/Bloomberg

Japan’s consumer prices unexpectedly fell and retail sales missed analysts’ forecasts, adding to evidence that the economy’s expansion is faltering as gains in the yen and austerity measures in Europe hit exports.

Consumer prices excluding fresh food fell 0.2 percent in June from a year earlier, the statistics bureau said in Tokyo today. The median estimate in a Bloomberg News survey was for no change in prices. Retail sales rose 0.2 percent, a separate report showed, the smallest gain since November and less than a median forecast for a 1.1 percent increase.

Japan is relying on domestic spending to support growth as global demand weakens and the boost from earthquake reconstruction work lessens. Finance Minister Jun Azumi says the government will weigh the need for fiscal stimulus after gross domestic product figures due Aug. 13, while former Ministry of Finance official Takatoshi Ito is calling for the central bank to buy euro bonds to weaken the yen.

“Today’s data clearly signals Japan’s economy is losing momentum,” said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo and a former central bank official, who correctly forecast the decline in core CPI. “If personal expenditures weaken, that will be bad news for Japan as exports are obviously slowing because of a deepening global slowdown.”

The yen traded at 78.23 per dollar as of 1:52 p.m. in Tokyo and 96.15 against the euro. Europe’s crisis has fueled the yen’s appeal as a haven asset, causing it to advance to an 11-year high against the euro this week.

Euro Outlook

“We must realize that a much bigger plunge in the euro may occur,” Ito, who was deputy vice finance minister from 1999 to 2001, said in an interview in Tokyo on July 25. BOJ purchases of euro bonds would be “surprising” and also show investors that Japan is supporting Europe, he said.

Asian stocks rose for a second day today after European Central Bank President Mario Draghi pledged yesterday to preserve the euro. The MSCI Asia Pacific Index added 1.7 percent at 1:53 p.m. in Tokyo, paring a weekly loss.

The yen has risen more than 6 percent against the dollar since mid-March, hurting profits of exporters, the driving force for the economy, according to Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo.

“A strong yen is complicating Japan’s fight against deflation by threating the recovery,” Ueno said. “There will probably be more doubts about the feasibility of the Bank of Japan’s inflation goal and that will result in calls for further policy action.”

Television Sales

Retail sales fell a seasonally adjusted 1.2 percent from May, compared with analyst estimates for a 0.2 percent increase. Sales of machinery and equipment, including televisions and DVD players, were the biggest drag, declining 32 percent from the same month a year earlier, the Trade Ministry report showed.

Typhoons likely limited retail spending in June, while auto sales may “plunge” in August or September after the end of government incentives for purchases, Adachi said.

A decline in oil prices was the largest drag on the consumer-price index, the analyst said. Oil has dropped about 20 percent from this year’s peak of $109.62 a barrel. Japan’s gasoline prices fell 12 percent to 139.6 yen per liter this week from the 2012 high, according to government data.

Japan’s economy probably expanded at a 1.6 percent annual rate in the three months ended June 30 from a 4.7 percent expansion in the first quarter, according to the median forecast of economists surveyed by Bloomberg News.

U.S. Growth Report

The U.S. Commerce Department may today report that the economy expanded in the second quarter at the slowest pace in a year. Gross domestic product rose at a 1.4 percent annual rate after a 1.9 percent gain in the prior quarter, according to the median forecast of economists surveyed by Bloomberg News.

Elsewhere in Asia, industrial output in Thailand shrank more than economists anticipated in June, sliding 9.6 percent from a year earlier. In Europe, Spain gives unemployment numbers, Italy reports business confidence and Germany releases inflation data.

In Japan, central bank Deputy Governor Hirohide Yamaguchi said on July 25 that the bank will probably add stimulus if it judges a strong yen is a big risk after examining the currency’s effect on the economy. Board member Takahide Kiuchi this week highlighted uncertainty about whether the BOJ can achieve its 1 percent inflation goal, and indicated more monetary stimulus may be needed.

A panel charged with outlining the Japanese government’s growth strategy has updated a final draft plan with a pledge to work with the central bank to combat deflation and the strong yen, according to a copy of the document obtained by Bloomberg News on July 26.

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