Wednesday June 10, 06:16 AM
Japanese hopes hit by fall in prices, machine orders
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TOKYO (AFP) - Hopes for recovery in the Japanese economy were dented as data showed wholesale prices fell at their sharpest in over 22 years, signalling a return to deflation, while machine orders also dived.
Core (Berlin: LJ1.BE - news) machinery orders -- a key gauge of business activity -- fell 5.4 percent month-on-month in April, far worse than the average forecast of a 0.8 percent increase.
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.
Naoki Murakami, chief economist at Monex, Inc., agreed that despite market hopes for a rebound, "the Japanese economic recovery still needs time."
Japanese wholesale prices, meanwhile, dived 5.4 percent in May from a year earlier -- the biggest drop since March 1987 when prices also tumbled 5.4 percent -- and worse than a market forecast of a 5.1 percent fall.
It was the fifth straight month of year-on-year declines and steeper than a revised 4.0 percent drop in April.
The data raised fears Japan will fall back into deflation, a decline in prices that hurts companies and leads consumers to delay spending in hopes of further price drops, dampening economic activity.
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.
At its May policy-setting meeting, the central bank 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.
The world's number two economy has been hit hard by the global downturn that has cut deep into its auto, electronics and other exports, driving up unemployment at home and depressing prices.
Prices have been driven down in part because global energy costs have fallen from their highs one year ago, a central bank official said.
Crude hit a record near 147 dollars a barrel in July last year but plummeted as the global crisis set in and fell to around 30 dollars earlier this year. They have begun to recover but only broke back above the 70 dollar barrier again on Tuesday.
But the official noted corporate goods prices also fell month-on-month, by 0.4 percent, the ninth straight month of such declines, indicating Japan's worst post-war recession was also driving down prices.
The official said that even though commodity prices have been recovering, "the domestic economy is so weak that companies can't raise their prices."
"We cannot say whether the Japanese economy as a whole has entered a new bout of deflation," the official told AFP. "As far as corporate goods prices are concerned, however, they are falling very rapidly."
-- Dow Jones Newswires contributed to this report --
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