Japan's Economy Hit by Fall in Prices, Machine Orders

Machinery orders fell 5.4%

Data showed wholesale price fell at their sharpest in over 22 years, signalng a return to deflation, while machine orders also dived. Core machinery orders -- a key gauge of business activity -- fell 5.4% month-on-month in April, far worse than the average forecast of a 0.8% increase.

Japanese wholesale prices, meanwhile, dived 5.4% in May from a year earlier -- the biggest drop since March 1987 when prices also tumbled 5.4%.

The fall suggested it is "still too early for recovery in the quarter" to June, said Macquarie Research economist Richard Jerram, adding that overseas demand for Japan's exports needed to pick up first.

Corporate goods prices also fell month-on-month, by 0.4%, the ninth straight month of such declines, indicating Japan's worst post-war recession was also driving down prices. A Bank of Japan official said that even though commodity prices have been recovering, "the domestic economy is so weak that companies can't raise their prices."

The data raised fears Japan will fall back into deflation. The country was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, leaving it mired in a long recession and prompting the central bank to slash interest rates to almost zero.

But Bank of Japan Governor Masaaki Shirakawa said key economic indicators -- such as industrial output and gross domestic product -- would likely improve in the second quarter. The central bank at its May policy-setting meeting upgraded its overall economic assessment for the first time in nearly three years, saying that Japan's "exports and production are beginning to level out." However, the central bank chief, speaking to a parliamentary panel, added that the effects of the sharp economic downturn would likely start to affect consumption and capital expenditure.

Credit Suisse also said in a client note that it expects "orders in the manufacturing sector to gradually recover towards summer".

"The sentiment in the global manufacturing sector is recovering at a fast pace to the level of last autumn," it said.

Copyright Agence France-Presse, 2009

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