Japan Deflation Returns as Production Slides

By Aki Ito - Dec 28, 2011 12:47 PM GMT+0700

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 today 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. Lawmakers told reporters in Tokyo today that a tax panel set up by Noda’s party has proposed doubling the nation’s sales tax by 2015, a move opposed by some ruling party members who’ve threatened to quit over the issue.

“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.

Tax Spat

To help fill government coffers, Noda is pushing for a tax panel to decide on what to do about the sales tax by this week.

The Democratic Party of Japan plans to raise the tax from 5 percent to 8 percent in October 2013, and to 10 percent in April 2015, lawmakers Takeshi Miyazaki and Motoyuki Odachi said after leaving a meeting of the panel today.

A rebellion within the party over plans for the levy adds to troubles for Noda after two of his ministers were censured by the upper house earlier this month. Nine DPJ members submitted their resignation today, the DPJ’s acting secretary general, Shinji Tarutoko, told reporters.

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 (MXAP) dropped 0.7 percent to 112.89 as of 1:02 p.m. in Tokyo. The measure has fallen 18 percent this year.

Stocks Drop

The Nikkei 225 Stock Average, which has declined 17 percent in the past twelve months, fell less than 0.1 percent to 8,439.55 as of 12:35 p.m. in Tokyo after swinging between gains and losses more than 15 times. The broader Topix Index fell 0.2 percent to 723.01 after rising as much as 0.1 percent.

Other reports in the Asia-Pacific region today 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 today, cloud the 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.

Floods Hit Production

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. (6758) 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, today’s figures show. Passenger car output slid 12.6 percent; iron and steel production declined 1.2 percent.

Japan’s manufacturers said they planned on boosting output by 4.8 percent in December and 3.4 percent in January, signaling optimism over the outlook as disruptions from the floods in Thailand ease.

Recovery Stalling

“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 today’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.

To contact the reporter on this story: Aki Ito in Tokyo at aito16@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net