Japan's consumer prices fall for 23rd month

AP News
Posted: Feb 25, 2011 7:04 AM
Japan's consumer prices fall for 23rd month

Consumer prices in Japan went south for the 23rd straight month in January as deflation kept its hold on the world's No. 3 economy.

But the pace of decline slowed for the fourth consecutive month because of the recent upward march of food and fuel prices worldwide.

The country's core consumer price index, which excludes fresh food, slipped 0.2 percent from a year earlier, the government said Friday.

The result is a tad better than Kyodo news agency's average market forecast for a 0.3 percent fall.

Deflation is one of the key problems facing Japan's economy, which has been struggling to keep its recovery on track.

While lower prices boost individual purchasing power, they are usually bad for the broader economy. It eats into corporate profits and can lead to job and wage declines. It also means that even at zero, real interest rates are too high.

In a speech earlier this month, Japan's central bank governor said that the country's extended deflation since the late 1990s stems from the long-term downtrend in Japan's economic growth potential.

"When the growth rate continues to decline for a protracted period, people's expectations for future income growth are reduced, and firms and households restrain their spending," Bank of Japan Gov. Masaaki Shirakawa explained.

The central bank has set its key interest rate at virtually zero and pledges to maintain its easy monetary policy until deflation disappears. It says the core CPI should begin rising soon and forecasts a 0.3 percent uptick in the fiscal year through March 2012.

That's not necessarily a good thing if a rise is mainly the result of higher raw material costs instead of better wages. Companies pass on higher costs to customers, which could cool consumer demand, which would then hurt the overall economy.

Nationwide prices for energy, which includes gasoline and kerosene, rose 4.7 percent in January, the ministry said in its report.

The preliminary core CPI for the Tokyo area _ considered an indicator of broader price trends for the country _ fell 0.4 percent.

This suggests that rising commodity prices have yet to make a major impact on consumer prices.

Goldman Sachs economist Chiwoong Lee said that because of Japan's complex industrial structure, it takes about six to 12 months for global commodity price increases to reach the Japanese consumer.

"There are so many intermediaries that cost can usually be absorbed along the way to some extent," he said in a note to clients. But this time lag may have gotten shorter after the latest financial crisis, which reduced the capacity of companies to absorb rising costs.