Finance counsels

Japan’s consumer prices fell for a second month in April, adding to signs that the recession will herald a return to deflation.

Consumer prices excluding fresh food declined 0.1 percent from a year earlier, the same pace as March, the statistics bureau said today in Tokyo. The result matched the median estimate of 29 economists surveyed by Bloomberg News.

Bank of Japan Governor Masaaki Shirakawa said this week that price declines will accelerate through the middle of the year ending March 2010 as demand slackens and crude oil continues to trade lower than last year’s record. Retailers including Nitori Co. and Daiei Inc. are cutting prices to entice cash-strapped consumers to spend more.

“The Japanese economy is entrenched in deflation, if we define it as continuous price declines,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Given the economy’s weakness, it’s hard to anticipate consumer prices will reverse course and allow the central bank to exit from its very accommodative monetary policy.”

Consumers may delay purchases if they expect goods to get cheaper, eroding corporate profits and forcing firms to cut wages. Japan only emerged from a decade of deflation when prices started to rise in 2005.

Core prices in Tokyo, the nation’s capital, fell 0.7 percent in May from a year earlier, the biggest drop in six years, according to the report. It was the first decline since September 2007.

Less Pessimistic

The Bank of Japan and the government raised their assessments of the economy for the first time since 2006 over the past week on signs that exports and production are starting to stabilize. Both pointed to weakness in consumer spending and rising unemployment as risks to a recovery.

Shirakawa this week said spending by companies and consumers will “remain severe for the time being.” The central bank cut the key interest rate to 0.1 percent in December, and has since bought corporate debt and expanded government bond purchases to revive the economy easy payday loans.

“The Japanese economy is facing renewed shocks from weakening capital investment and consumption, the two pillars for domestic demand,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. “That means the economy will remain under strong deflationary pressure.”

Core prices, the central bank’s key gauge of inflation, will slide 1.5 percent this fiscal year and 1 percent in the next, the bank’s policy board forecast last month. Sumitomo Mitsui’s Muto said prices may keep falling until 2012.

Wholesale Costs

Wholesale inflation, or the costs companies pay for goods and fuel, tumbled at the fastest pace in 22 years in April, and prices they pay for services declined for a seventh month.

Some central bank board members said that they should pay “particular attention” to the risk that inflationary expectations will decline over the long term, according to minutes of their April 30 meeting.

Economists say the drop in prices is worse than today’s number showed. Core prices would have declined an additional 0.2 percentage point had the government not temporarily waived the gasoline tax in April last year, Muto said.

Nitori, a furniture retailer, said this week that it will cut prices as much as 40 percent on May 30. The company has launched five price-cutting campaigns in the past year.

Daiei, a supermarket operator, lowered prices of 1,000 items of clothing, food and household goods this week, expanding its discounts to 6,000 items since November.

Bank of Japan policy makers consider inflation to be stable between zero and 2 percent over the long term. At last month’s meeting, one member said actual price movements “would inevitably deviate downward” from the range for now because the economy has undergone a “significant shock.”

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