Consumer prices dropped 2.4 per cent in August, a record since 1971. Fears grow that lower demand might lead to further cuts in production and more job losses, setting in motion a deflationary spiral.

Tokyo (AsiaNews/Agencies) – Core consumer prices excluding fresh food, which have been falling since March, dropped 2.4 per cent in August from a year ago, a record since 1971, compared to a 2.2 per cent decline in July. Much of this drop reflects last year’s peak in oil costs when crude reached an unprecedented US$ 147.27 a barrel in July to drop more than 50 per cent since then.

Even excluding food and energy, consumer prices fell 0.9 percent in August, the same pace as July, which was the sharpest decline in seven years?

This drop reflects the decline in overall consumer spending, a consequence of a record jobless rate of 5.8 per cent.

Even though the GDP rose 0.9 per cent after various months of decline, consumers are still unwilling to spend more

While most developed economies in the world are expected to battle with inflation in the coming months, deflation in Japan is likely to persist into 2010 because of weak consumer demand, excess capacity and strength of the yen, this according to David Cohen at Action Economics in Singapore.

Yesterday, the yen rose to an eight-month high of 88.22 against the dollar after Hirohisa Fujii, Japan’s finance minister, indicated that Tokyo would not intervene to stem its recent rise. It fell to 90.07 this morning.

The business community is concerned about recent announcement by the new ruling Democratic Party government to suspend parts of a Y 15,000 billion economic stimulus package and by the worsening export demand, which could undermine the real health of the economy.

For the new government increasing domestic demand is crucial. Prime Minister Yukio Hatoyama has promised cash transfers to families with children, toll-free highways and income supplements for farmers.

By holding back the recovery and hiring, lower demand is cutting into families’ purchasing power. “As households’ spending power falls, there’s concern that this deflation will lead to further deflation—in other words, that we’ll enter into a deflationary spiral,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Bank of Japan Governor Masaaki Shirakawa said that this month prices would continue to fall for “some time.” But the Central bank noted that the economy showed “signs of recovery,” partly because of a lower lending rate.

Other experts are more optimistic. For them, lower consumer demand is due to consumer expectations that prices might drop further. Shortly however, consumers should start spending again.

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• deflation
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