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TOKYO: Japanese wholesale prices fell at the fastest ever pace last month, data showed Friday, deepening concern that another bout of deflation could hinder a recovery in the world's number two economy.
The prices of goods traded between companies dropped by 6.6 per cent in June from a year earlier, the Bank of Japan said, the steepest decline since records began in 1960.
It was the sixth straight year-on-year fall, following a revised 5.5 per cent drop in May.
Lower commodity prices were the main cause, an official at the central bank said.
"Weak domestic demand is also pressuring prices," he added.
While falls in the cost of oil and other raw materials are good news for many manufacturers, the fear is that sustained drops in consumer prices could create another dangerous deflationary spiral.
"The latest deflationary pressure could negatively affect the economy by hurting corporate earnings," said Hideyuki Araki, an economist at Resona Research Institute.
Deflationary pressure will probably intensify due to smaller summer bonuses for workers and the weak job market, Araki said.
Month-on-month, wholesale prices fell 0.3 per cent in June after a revised drop of 0.5 per cent in May, extending their losing streak to a 10th straight month, the central bank said.
Japan was stuck in a deflationary spiral for years after an economic bubble burst in the early 1990s, prompting consumers to put off purchases in the hope of further price drops and reducing corporate earnings.
Japan is "undoubtedly in deflation" again, said Takuji Aida, an economist at investment bank UBS.
But the economy has not slipped in a vicious spiral of falling prices reducing consumer spending, largely thanks to the government's economic stimulus packages, he said.
Falling prices would even have some positive impact by increasing households' purchasing power, he argued.
Japan's annual wholesale inflation topped seven per cent last July on the back of higher oil and material costs, but has since given way to falling prices as a commodities boom lost steam amid the global economic downturn.
The spectre of a return to deflation comes despite recent signs that the country's worst economic slump since World War II is easing.
Japan entered recession in the second quarter of 2008 as its heavy dependence on overseas demand to drive its economic growth left it highly exposed to the global downturn.
Gross domestic product shrank at an annualised pace of 14.2 per cent in the first quarter of 2009, the worst performance on record.
Tokyo has unveiled a series of stimulus packages, including cash handouts for households and incentives to buy fuel-efficient cars.
Japan's unemployment rate rose to 5.2 per cent in May, the highest level in more than five years, as companies shed jobs to cope with the recession, the government has reported.
- AFP/yt
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