Japanese wholesale prices are falling at their fastest rate since 2002, March figures showed today, as weakening domestic demand on top of falling commodity prices drives Japan towards its second bout of deflation this decade.
With interest rates already almost at zero, analysts say the Bank of Japan has few weapons to fight deflation as the country goes through its worst recession since the second World War.
"The BOJ has reached its limit in terms of conventional monetary policy moves," said Norihiro Fujito, general manager at Mitsubishi UFJ Securities.
"If prices continue to slide, the BOJ may need to expand its buying of government bonds and move towards quantitative easing. It may also broaden the range of corporate bonds it buys, relaxing its standards on credit ratings, for example."
Japanese wholesale prices in March were down 2.2 per cent from the same month a year earlier, more than the median market forecast for a 1.8 per cent fall, Bank of Japan data showed.
That followed a revised 1.6 per cent fall in the year to February and was the third straight month of annual decline.
Analysts say it is inevitable that consumer prices will lapse back into deflation after flat annual figures for the years to January and February.
"Pressure on consumer prices will be strong at least for the first half of this year," said Junko Nishioka, chief Japan economist at Royal Bank of Scotland.
Wholesale prices fell for six years running from financial 1998/99 to 2003/04 as the Japanese economy struggled with an earlier financial crisis. Consumer prices declined throughout that period and then for one year longer.
March CPI figures are due out at the end of this month.
Overall final goods prices, which track prices of final products charged to businesses, fell 2.6 per cent in March from a year earlier. Domestic final goods prices fell 1.7 per cent.
Falling steel prices were the biggest contributor to a 0.2 per cent month-on-month decline in wholesales prices in March, reflecting weak demand from the construction and automobile sectors, a BOJ official said.
Processed food prices also fell significantly, reflecting consumers' strong inclination for cheaper merchandise.
"Wholesale prices showed there is widespread weakness in final demand in light of the recession," the official said.
Wholesale inflation quickly lost steam after hitting a 27-year peak in August, as the worsening global financial crisis sent commodities prices tumbling.
Now, with both domestic and external demand faltering, Japan could be the slowest among major economies to recover from recession even as the government scrambles to pull the economy out of the deepening recession.
"Even though there have been some positive signs on the economy recently, today's data showed prices are under pressure from a widening output gap," said Nishioka of RBS.
For the financial year that ended in March, wholesale prices rose 3.3 percent, marking the largest rise in 28 years, due to a surge in commodity prices in the first half of the year.
But Takeshi Minami, chief economist at Norinchukin Research Institute, said the main factor for wholesale price moves is shifting to the shortfall in demand from oil prices.
Japan's economy contracted 3.2 per cent in the last quarter of last year and plunging business confidence has raised fears that the situation is getting worse.
The world's number two economy has been more severely hit by the global recession than other major economies due to its heavy dependence on exports.
Japan's government on Friday announced new stimulus spending of 15.4 trillion yen ($154 billion), equivalent to 3 per cent of GDP, to help lift the country out of its deepest recession since the second World War.
Reuters