Japan sees light at end of deflation tunnel


TOKYO — Japan said Friday its core consumer prices fell for an eighth straight month in September, but there were signs that Asia’s largest economy might be finally winning its long struggle with deflation.

Despite its gradual recovery from a slump stretching back over a decade, Japan’s economy has taken longer than expected to decisively exit deflation, with consumer prices returning to negative territory early this year.

Now signs of an upturn in the capital Tokyo have triggered expectations that prices across the country could return to a positive trend as soon as next month.

Japan’s core consumer prices fell 0.1 percent in September from a year earlier, the government said, in line with market expectations.

But the core consumer price index (CPI) for Tokyo alone in October, which is seen as a leading indicator for national price trends, rose 0.2 percent from the previous month and was flat from a year earlier.

If the nationwide index rises by the same magnitude month on-month in October it would be up 0.1 percent from a year earlier, although there is a chance it could later dip back into negative territory, analysts said.

Record high oil prices are expected to put upward pressure under prices in the near term, said Mamoru Yamazaki, chief economist at RBS Securities Japan. “In addition, other prices such as food and taxis and many items are reported to be rising in price. Next year I think that prices will be pushed up mainly due to a gradual change in macroeconomic conditions,” he said.

The government also said it would not include new discount mobile telephone price plans in the CPI, easing concerns that aggressive competition between the major mobile operators could delay an exit from deflation.

Lingering concerns over deflation have created a headache for Japan’s central bank, which last year raised interest rates for the first time in almost six years, followed by another quarter-point hike in February.

Although deflation makes goods cheaper for consumers, it is considered negative for the overall economy as it encourages people to put off purchases and undermines corporate profits, wages and property prices.

With global financial markets still shaky after the rout sparked in August by the U.S. housing market woes, some analysts believe the central bank will hold off from raising interest rates again this year. Yamazaki said he expects the Bank of Japan to wait until February before making its next move.

But others argue that another rate hike is still possible by the year end if financial markets stabilize, noting that the Bank of Japan is wary about keeping rates very low for too long.

Although the Japanese economy is gradually recovering from the recession of the 1990s, there are worries that slowing growth in the United States could undermine demand for Japanese cars, electronics and other goods.

The government also reported that Japan’s industrial output dropped by 1.4 percent in September from the previous month as automakers curbed production, matching market forecasts.

The dip followed a rise of 3.5 percent in August. Production is expected to increase by 3.8 percent in October but drop 0.7 percent in November, the Ministry of Economy, Trade and Industry said.

Japan’s U.S.-bound exports suffered the biggest drop in almost four years in September, the government said earlier this week.

But analysts said that robust growth in other major trading partners such as China should help to underpin Japan’s industrial output.

“Although weak exports to the U.S. remain a concern, we expect production to continue trending moderately upward on support from firm domestic demand and exports to other countries,” said Barclays Capital economist Yuichiro Nagai.