TOKYO, Nov. 20, 2009 (Kyodo News International) --
(Editors: RECASTING WITH NEW INFO)
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 that added to widespread concerns the economy may recover at a slower pace than earlier thought.
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.''
His comments came after the Cabinet Office publicized its monthly report on economic conditions that said, ''Recent price developments show that the Japanese economy is in a mild deflationary phase.''
Analysts say the assessment may herald more spending by the government to set the fragile economic recovery on a solid footing, with some adding that recent falls in tax revenues due to sluggish corporate earnings may lead to more government debt issuance as well as more pressures on the Bank of Japan to do something to rescue state finances.
The monthly report last used the word ''deflation'' in August 2006.
Kan also told reporters that the government sees the necessity to collaborate with the BOJ to beat deflation, calling for ''appropriate'' handling of monetary policies by the central bank.
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.
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'' from a set of emergency policies the bank has introduced to ease credit conditions and facilitate corporate finance since the financial crisis last year.
Finance Minister Hirohisa Fujii expressed concern about deflation in Japan but said there is no magic prescription for the challenge from a fiscal front as public spending will not help raise prices.
''We're aware of the serious risk,'' Fujii said at a separate press conference. ''The current situation is not what it should be.''
The latest economic outlook released Thursday by the Organization for Economic Cooperation and Development warned that deflationary pressures continue unabated in Japan and called on the central bank to deal with them appropriately, such as maintaining interest rates at their current low levels.
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 for the second straight quarter of expansion due partly to pickup in exports, the government said Monday in a preliminary report.
But the economy shrank 0.3 percent on a nominal basis, affected by falling prices.
Recent price data have fueled concern. The country's core consumer price index, excluding fresh food prices, fell for seven months through September. It dropped a record-fast 2.4 percent in August from a year earlier and 2.3 percent in September.
Japanese wholesale prices, meanwhile, dropped 6.7 percent in October after registering an 8.0 percent fall in September and the sharpest ever 8.5 percent slide in August.
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 the state finances.
They say declining tax revenues, which follow sluggish corporate earnings due mainly to the yen's rise 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 Prime Minister Yukio 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.''
