Japanese wholesale prices fell a record 8.5 per cent in the year to July, highlighting the growing deflationary pressure in the economy and limiting the Bank of Japan's scope for ending its unorthodox policy measures.
Although the price slide is likely to moderate in autumn as the effect of last summer's spike in oil prices wears off, economists say weak domestic demand could prolong the country's second bout of deflation in less than a decade.
Final goods prices, a component of the wholesale price index that loosely tracks consumer price moves, dropped an annual 3.3 per cent, accelerating from June's 2.6 per cent fall.
“We're going to see increasing downward price pressure from weak demand,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“The Bank of Japan has said the country is not entering a deflationary spiral, so it won't ease monetary policy further.
But as long as weakness in the economy and prices persists, it won't be able to raise rates either. The bank will keep interest rates on hold at least until March 2011,” he added.
The fall in the corporate goods price index (CGPI) was slightly smaller than a median market forecast for an 8.7 per cent drop but much bigger than a revised 6.7 per cent drop in June.
The slide was due in large part to oil prices more than halving from their record highs near $150 per barrel in July last year.
But lower prices for steel, chemicals, nonferrous metals and scrap metal from a year earlier also weighed on wholesale prices, a BOJ official told reporters at a briefing.
Japanese government bond futures rose 0.14 point to 137.34, rebounding from a seven-week low hit on Monday as major stock markets fell due to doubts about the strength of the global economic recovery.
Still, the CGPI data for July did offer evidence that the pace of wholesale price declines could ease provided the global economy continues to recover.
Compared to the previous month, the CGPI rose 0.4 per cent, the first gain in almost a year and better than a median estimate for a flat reading, as a rebound in overseas economies lent some support to prices of energy and chemicals, a BOJ official said.
“The month-on-month gain apparently reflects a recent upturn in oil and coal prices and strong demand from China for such products as chemicals,” said Azusa Kato, economist at BNP Paribas.
Reuters