Falls in prices, output signal risk recession has returned in Japan

PUBLISHED : Saturday, 01 September, 2012, 12:00am
UPDATED : Wednesday, 12 September, 2012, 2:23pm

Japan's consumer prices slid at a faster pace in July, and industrial production unexpectedly fell, raising the danger the world's third-largest economy has slipped back into a contraction.

The benchmark price gauge, which excludes fresh food, fell 0.3 per cent from a year earlier, putting the central bank's 1 per cent inflation goal further from reach, a government report showed yesterday. Industrial output fell 1.2 per cent. A private measure of manufacturing for last month was the lowest since the aftermath of last year's earthquake.

The figures reflect diminishing demand overseas for Japan's exports amid the European crisis, exchange rate appreciation and the end of incentives for vehicle purchases. With Prime Minister Yoshihiko Noda's government predicting yesterday it will miss a deficit reduction target, pressure may rise on the Bank of Japan to expand stimulus measures.

"The risk of a contraction in the second half of the year is increasing," said Junko Nishioka, chief economist at RBS Securities Japan. "The downside risks on the economy are increasing and could push the Bank of Japan to further expand its asset purchase programme [this] month."

The jobless rate was unchanged at 4.3 per cent in July, a government report showed.

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 falling, the government said. The trade ministry's assessment that production is "flat" remained unchanged from July.

"The most shocking data was production," said Norio Miyagawa, a senior economist at Mizuho Securities Research and Consulting. The central bank may need to bolster stimulus as the economy faces a deeper than expected slowdown, Miyagawa said.

In Japan, a manufacturing purchasing managers' index slipped to 47.7 last month, the lowest level since April last year, according to Markit Economics. A reading below 50 indicates a contraction.

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.