Japan Faces Deflation as Exports Slump, Says Barclays' Morita

By Toru Fujioka

Nov. 20 (Bloomberg) -- Japan is sliding back into deflation as slumping global demand cuts exports, prompting companies to cut jobs and reduce spending, said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.

``Japan will go back to deflation'' that plagued the country for 10 years until 2007, Morita said in an interview. ``The global financial crisis is forcing companies to cut jobs and keep a lid on investment.''

Exports declined at the fastest pace in almost seven years in October, worsening the outlook for an economy that sank into a recession in the third quarter. Isuzu Motors Ltd., Japan's largest maker of light-duty trucks, said today it will cut 1,400 contract workers and Mazda Motor Corp. said it would shed 500.

``We are at a phase where the economy is going to suffer severely from weakness in domestic demand, joining the decline in exports,'' Morita said. Consumer spending accounts for about 55 percent of Japan's economy.

Deflation is most likely to return to Japan in the three months starting July 2009, a year after inflation peaked at 2.4 percent, the fastest pace in 11 years, Morita said. Higher prices for food and fuel costs earlier this year left consumers with less to spend, causing household spending to 2.3 percent in September.

Falling prices may prompt Bank of Japan Governor Masaaki Shirakawa to return to the so-called quantitative easing policy that keeps interest rates close to zero percent and floods the money market with cash.

Zero Rate Policy

The central bank introduced the policy in March 2001 to overcome deflation and support economic growth. It ended the policy five years later.

A brief return to deflation in Japan wouldn't necessarily be a bad for the economy, some economists said.

``It is crucial to distinguish between a few quarters of negative inflation due to the unwinding of the commodity price shock, and a more sustained period of generally falling wages and prices,'' said Julian Jessop, chief international economist at Capital Economics in London. ``The former would provide a welcome boost to real incomes and consumer confidence.''

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net