Japan Heads for Deflation as Retail Sales Tumble 5.8%

By Jason Clenfield and Mayumi Otsuma

March 27 (Bloomberg) -- Japan’s consumer prices stalled in February and retail sales tumbled the most in seven years, signaling a return to deflation is likely to deepen the recession.

Prices excluding fresh food were unchanged from a year earlier, the statistics bureau said today in Tokyo. Retail sales declined 5.8 percent, the Trade Ministry said, more than the 3 percent economists predicted.

An unprecedented drop in exports is forcing companies to fire workers and cut wages, weakening household spending and pushing the economy closer to its worst slump in the postwar era. With the benchmark interest rate already at 0.1 percent, the Bank of Japan has little scope to stop prices from falling.

“Japan is back in deflation and the price level is set to decline for several years,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. Deflation “erodes the health of the corporate sector and means that the Bank of Japan cannot cut interest rates to appropriate levels.”

Central bank Governor Masaaki Shirakawa said this week that core prices are on the verge of falling and policy makers are committed to preventing the economy from sliding into a deflationary spiral.

During Japan’s last bout with sustained price declines that began a decade ago, bankruptcies surged and the jobless rate advanced to a postwar high. The central bank responded by cutting interest rates to zero percent and flooding the banking system with reserves for five years through 2006.

Reasons to Worry

“There are many reasons we have to worry about a return of deflation,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Companies may race to discount to get rid of inventories if they keep posting losses, and wage cuts and bankruptcies will spread in coming months.”

Investors shrugged off the reports. The Topix index rose 0.9 percent at the lunch break in Tokyo, heading for its best week in more than 16 years as better-than-expected earnings by U.S. companies fueled speculation the global recession is abating. The yen traded at 98.27 per dollar from 98.71.

Wages fell for a third month in January, leaving consumers with less money to spend and forcing retailers to lower prices.

Aeon Co., Japan’s largest supermarket operator, last week said it will offer discounts on 5,100 items this month. Rivals Ito-Yokado Co. and Seiyu Ltd. already cut prices of food, clothing and household products this month.

“Clearly the consumer has taken a shock,” Jerram said. “The pain in manufacturing has led to greater insecurity, and it seems to have damaged consumer spending.”

Store Discounts

Excluding food and energy, prices fell 0.1 percent in February, a second monthly decline. Finance Minister Kaoru Yosano said it was “too early” to conclude that the drop meant Japan has slid back to deflation.

Core prices in Tokyo rose 0.4 percent in March from a year earlier, slower than the 0.6 percent in February.

Sales at large retailers, which include supermarkets and department stores, plunged 8.2 percent, the biggest drop in 11 years. J. Front Retailing Co., the holding company that operates department stores Daimaru Inc. and Matsuzakaya Co., said sales slid 15 percent in February as shoppers cut back on clothing and luxury items.

Still, the retail slump may have been overstated because there were fewer shopping days in February compared with the same month in 2008, a leap year. About half the declines were owing to a drop in revenue at gasoline retailers, reflecting crude oil’s 59 percent slide last month from a year earlier.

Also, the retail report doesn’t account for the growing share of money spent through the internet or on services.

Consumer spending fell 0.4 percent last quarter from the previous three months, a fraction of the record 13.8 percent drop in exports that drove the worst quarterly contraction in gross domestic product since the 1974 oil crisis.

To contact the reporters on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net