Hopes for recovery in the Japanese economy were dented yesterday as data showed wholesale price falls at their sharpest in more than 22 years, signaling a return to deflation, while machinery orders also dived.
Core machinery orders — a key gauge of business activity — fell 5.4 percent month-on-month in April, far worse than the average forecast of a 0.8 percent increase.
The fall suggested it is “still too early for recovery in the quarter” to June, said Macquarie Research economist Richard Jerram, adding that overseas demand for Japan’s exports needed to pick up first.
Naoki Murakami, chief economist at Monex, Inc, agreed that despite market hopes for a rebound, “the Japanese economic recovery still needs time.”
Japanese wholesale prices, meanwhile, dived 5.4 percent last month from a year earlier — the biggest drop since March 1987 when prices also tumbled 5.4 percent — and worse than a market forecast of a 5.1 percent fall.
It was the fifth straight month of year-on-year declines and steeper than a revised 4 percent drop in April.
The data raised fears Japan will fall back into deflation, a decline in prices that hurts companies and leads consumers to delay spending in hopes of further price drops, dampening economic activity.
The country was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, leaving it mired in a long recession and prompting the central bank to slash interest rates to almost zero.
But Bank of Japan Governor Masaaki Shirakawa said key economic indicators — such as industrial output and gross domestic product — would likely improve in the second quarter.
At its policy-setting meeting last month, the central bank upgraded its overall economic assessment for the first time in nearly three years, saying that Japan’s “exports and production are beginning to level out.”
Credit Suisse also said in a client note that it expects “orders in the manufacturing sector to gradually recover towards summer.”
“The sentiment in the global manufacturing sector is recovering at a fast pace to the level of last autumn,” it said.
The central bank chief said the effects of the economic downturn would likely start to affect consumption and capital expenditure.
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