Japan May Be Slipping Into Deflation, Record Output Gap Shows
Japan’s demand for goods and services declined by a record last quarter, adding to evidence deflation may return to haunt the world’s second-largest economy.
The output gap, a measure of the balance between demand and supply in the economy, fell 8.5 percent in the three months ended March 31, the Cabinet Office said in Tokyo, the biggest decline since the government started tracking the data in 1980. A separate report today showed that wages slid 2.5 percent, extending their longest losing streak since 2003.
The deepest recession in the postwar era has left companies including Hitachi Ltd. with factories and workers they no longer need, pushing Japan closer to the deflation it emerged from in 2005. Consumer prices are declining as companies reduce salaries to cut costs and retailers such as Nitori Co. discount to attract cash-strapped households.
“Indicators such as the wage report signal that deflation is becoming a more serious problem,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Given the deterioration in labor and wage conditions, we could see deflation linger even if the economy recovers.”
Economists regard the output gap as a key indicator of whether the economy is slipping into to a period of continuous price declines. The gauge’s decrease last quarter was almost double the 4.5 percent drop in the previous three months.
Falling Prices
Consumer prices excluding fresh food slid for a second month in April, when the jobless rate soared to a five-year high of 5 percent. Gross domestic product shrank at an unprecedented 15.2 percent annual pace in the first quarter.
Hitachi, a maker of home appliances and hard-disk drives, will slash costs by 500 billion yen ($5.3 billion) this fiscal year to minimize losses after a record 787.3 billion yen deficit last year cash loans. The company also plans to cut 7,000 jobs.
A return to deflation could dash hopes that Japan will enjoy a full-fledged recovery as it pulls out of its slump. Exports fell 39.1 percent in April, moderating for a second month, and industrial output surged the most in 56 years as companies started to rebuild stockpiles they managed to burn off during the height of the global downturn.
Households have yet to reap the benefits from a bottoming out in overseas demand, cutting their outlays for a record 14th month in April.
Nitori, a furniture retailer, said last week that it will cut prices as much as 40 percent on May 30. Daiei Inc., a supermarket operator, lowered prices on 1,000 items last week, expanding its discounts to 6,000 items since November.
Not Cheaper
“The average person thinks deflation makes things cheaper,” said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. “He doesn’t understand that it reduces his income, that it makes it more likely the company he works for will go bankrupt, that it damages public finance.”
Deflation also encourages risk aversion among households “because you’re overly rewarded for doing nothing,” Jerram said. Japanese have financial assets worth about 1,400 trillion yen, more than half of which sits in bank accounts.
Some Bank of Japan board members said that they should pay “particular attention” to the risk that inflationary expectations will decline over the long term, according to minutes of their April 30 meeting released last week. The central bank forecasts core prices will fall 1.5 percent in the current fiscal year and 1 percent next year.