Gov't admits Japanese economy mired in deflation+

TOKYO, Nov. 20 Kyodo -
The government admitted Friday that the Japanese economy has been mired in mild
deflation as consumer prices have kept falling, marking the first such
assessment in over three years and which adds to widespread concerns the
economy may recover at a slower pace than earlier thought.

The move came as the Cabinet Office released its monthly economic report,
warning that falling prices have hurt corporate earnings and led to lower wages
and higher unemployment rates. Prime Minister Yukio Hatoyama said the
government is required to handle the difficult task of stimulating the economy
while keeping fiscal discipline.
''The government assesses that the economy is in mild deflation,'' Hatoyama
told reporters. ''Deflation takes place while demand is little boosted. So how
we can implement measures to stimulate the economy is a very important issue.''
But he said the government should pursue fiscal discipline at the same time.
''We're required to carry out smart economic policies,'' he said.
The government also said it is necessary to work with the Bank of Japan to beat
deflation, calling for ''appropriate'' handling of monetary policies by the
central bank. The BOJ, meanwhile, said it shares views on prices with the
government.
Analysts say, however, the government's assessment of deflation may put
pressure on the BOJ to maintain its emergency credit-easing policies taken
after the financial crisis last year and even to expand its outright purchase
of government bonds to help finance the state budget at a time when tax
revenues are falling due to sluggish corporate earnings.
Deputy Prime Minister Naoto Kan said the economy has been on a recovery track.
But he also pointed to consumers increasingly favoring cheaper products,
saying, ''Our view is that this deflation may continue for the time being
rather than being temporary, and we must be careful about that.''
Kan was referring to the government's monthly report that said, ''Recent price
developments show that the Japanese economy is in a mild deflationary phase.''
The report last used a similar expression in August 2006.
Kan, also the minister in charge of economic and fiscal policies, declined to
specify what the BOJ should do.
But he added, ''It's still too early (for the BOJ to consider) any exit
strategy'' to end a set of emergency policies the bank has introduced to ease
credit conditions and facilitate corporate finance.
Earlier in the day, the BOJ held its key short-term interest rate steady at 0.1
percent while upgrading its assessment of economic conditions in the country
for the third straight month.
BOJ Governor Masaaki Shirakawa said at a press conference that the bank's view
on prices is consistent with that of the government. ''I don't feel there is a
difference in our views on price moves,'' he said.
But its statement released after the policy meeting suggests there is a
difference as it did not use words like ''deflation'' or ''deflationary.
In the statement, the BOJ acknowledged sharp falls in consumer prices. However,
it said the pace of fall is ''likely to moderate as the effects of the changes
in the prices of petroleum products abate,'' adding, ''There is a possibility
that inflation will rise more than expected due to a rise in commodity
prices.''
Deflation started to drag on the Japanese economy in the late 1990s when
financial institutions were mired in a bad-loan crisis. The government first
admitted to deflation in its March 2001 report.
The government offers no clear definition of deflation. In 2001, the assessment
came after prices continued to fall for two years. This time, the judgment came
only seven months after Japan's key consumer prices started falling.
The core consumer price index, excluding fresh food prices dropped a
record-fast 2.4 percent in August from a year earlier and 2.3 percent in
September due mainly to slides in crude oil and other energy costs.
The warnings of falling prices came despite signs of recovery seen recently in
Japanese economic output.
Japan's gross domestic product rose an annualized 4.8 percent on a
price-adjusted basis in the July to September period on pickup in exports, the
government said Monday in a preliminary report, although the economy shrank 0.3
percent on a nominal basis.
Some analysts say what seems to be a sudden government campaign to take up
deflation as an urgent issue to the economy highlights the challenges facing
state finances.
They say declining tax revenues, which follow sluggish corporate earnings due
mainly to the yen's sharp rises against other major currencies, may force the
government to issue more debts to finance its budget and economic stimulus
packages.
Hiromichi Shirakawa, chief economist at Credit Suisse in Japan, said the
tighter fiscal conditions bring a dilemma to the government of Hatoyama, who
took office in September after criticizing the previous governments' excessive
dependence on debt.
''It seems the government is facing trouble managing finances,'' Shirakawa
said. Speaking loud of deflation and fueling a sense of urgency could enable
the easiest way for debt issuances, he added.
As for the governmental pressure on the BOJ, he said, ''Focus is on whether
(the bank) will be pressed to extend its operation to purchase outright
government bonds.''
==Kyodo
2009-11-20 22:44:31