Deflationary Spiral in Japan?

Posted on Monday, September 28, 2009

Japan's consumer prices fell at a record pace in August, heightening the risk that prolonged deflation may hamper the country's recovery from its deepest postwar recession.

Prices excluding fresh food slid 2.4 percent from a year earlier, topping the previous month's 2.2 percent decline, the statistics bureau said today in Tokyo. The drop matched the median estimate of 28 economists surveyed by Bloomberg News.

Companies from Fast Retailing Co. to Sony Corp. are lowering prices to attract consumers who face record unemployment and plunging wages. A return to deflation that the economy only shook off in 2005 may weigh on growth as consumers and companies cut back spending in anticipation that prices will keep falling.

"We'll soon start to see that there isn't enough domestic demand to push up wages," said Kyohei Morita, chief economist at Barclays Capital in Tokyo. "As households' spending power falls, there's concern that this deflation will lead to further deflation -- in other words, that we'll enter into a deflationary spiral."