Japan deflation returns as production slides

Industrial output slumps 2.6 percent on Thailand floods


Japan’s rebound from the March earthquake and tsunami sputtered in November as production and retail sales tumbled, deepening the nation’s return to the deflation that first took hold a decade ago.

Industrial output slumped 2.6 percent from October, more than all the forecasts in a Bloomberg News survey of 29 economists, a government report showed Wednesday in Tokyo. Retail sales slid 2.1 percent. Consumer prices excluding fresh food fell 0.2 percent from a year earlier after a 0.1 percent decline the previous month.

The weakening economy, hurt by Europe’s debt crisis and plans by companies from Panasonic Corp. to Nissan Motor Co. to shift production abroad, may undermine Prime Minister Yoshihiko Noda’s plan to raise taxes and cut the world’s largest debt burden. Noda’s party Wednesday is scheduled to propose boosting the sales levy, which polls show a majority of the public oppose.

“Fundamentally, Japan’s economy is on a downward slope,” said Yoshimasa Maruyama, chief economist at Itochu Corp. “Exports are falling and negatively impacting Japan’s economy due to the global slowdown.”

To stoke demand and help rebuilding efforts, Japan’s government has approved four supplementary budgets since the March 11 earthquake and tsunami, worth around 20 trillion yen ($257 billion). A separate budget account will also be created for the fiscal year starting April 1 to pay for reconstruction. 

Asian stocks fell for a second day, with the regional benchmark index headed for the worst year since 2008, after a report showed U.S. housing prices fell, damping the earnings outlook for Asian exporters. The MSCI Asia Pacific Index dropped 0.5 percent to 113.11 as of 11:30 a.m. in Tokyo. The measure has fallen 18 percent this year.

The Nikkei 225 Stock Average, which has declined 17 percent in the past twelve months, rose less than 0.1 percent to 8,441.62 as of 10:38 a.m. in Tokyo after falling as much as 0.2 percent earlier. The broader Topix Index fell 0.1 percent to 723.23 after rising as much as 0.1 percent.

Other reports in the Asia-Pacific region Wednesday showed confidence among South Korean manufacturers dropping to a 30-month low as Europe’s sovereign-debt crisis and the death of North Korean leader Kim Jong-il, who is being laid to rest Wednesday, cloud the business outlook. In the Philippines, the trade deficit narrowed to $932 million, the National Statistics Office said.

In Europe, a report may show retail sales in Sweden last month fell 0.3 percent from a month earlier.

The second consecutive drop in Japan’s consumer prices occurs against a backdrop of weakening global demand and the yen’s advance against the dollar. The yen has strengthened almost 6 percent in the past 12 months, the best performer among Group of 10 currencies. The dollar fetched 77.80 yen as of 11 a.m. in Tokyo from 77.88.

The yen’s gain has exacerbated woes caused by Thailand’s worst flooding in almost 70 years. The floods contributed to the drop in production, crippling the output in Southeast Asia of Japanese companies such as Sony Corp. and Honda Motor Co.

“The big drop in the numbers this time is due more to the Thai flooding than to the global economy,” Itochu’s Maruyama said. “In terms of the production numbers now, basically it’s on a downward trend in the long run.”

The biggest seasonally adjusted monthly drops in industrial production were in the information electronics industry, with overall output dropping 23.7 percent, Wednesday’s figures show. Passenger car output slid 12.6 percent; iron and steel production declined 1.2 percent.

“Industrial production is unlikely to recover to” levels seen before the 2008 global financial crisis, Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd., said before Wednesday’s reports.

Other data also suggest Japan’s recovery may be stalling. Exports fell for the second straight month in November from a year earlier and capital spending in the third quarter dropped 9.8 percent. Large manufacturers are more concerned about business prospects, with the Bank of Japan’s Tankan quarterly index of corporate sentiment falling to minus 4 this month. A negative figure indicates pessimists outnumber optimists.

The financial situation in the euro area, Japan’s third- biggest export destination, also shows no sign of improving, with 10-year Italian government bonds hovering around 7 percent. Fitch Ratings on Dec. 17 lowered the credit outlook of Spain, Italy and “AAA”-rated France, citing Europe’s failure to find a “comprehensive solution” to its crisis.

The appreciation of the yen is hurting exports, Japan’s finance minister, Jun Azumi, said on Dec. 24. The finance minister has indicated he’s prepared to sell the currency in the foreign-exchange markets. The Finance Ministry said last week that it plans to raise the issuance limit for bills to fund intervention to an unprecedented 195 trillion yen. 

(Bloomberg)