Japan's consumer prices keep falling in February

[March 26, 2010]  TOKYO (AP) -- Japan's consumer prices kept falling in February as deflation strengthened its hold on the world's second biggest economy.

The core consumer price index, which excludes fresh food, dropped 1.2 percent from a year earlier, the government said Friday, marking the 12th straight month of decline.

The reading matches Kyodo News agency's average forecast in its survey of economists.

Lower prices may seem like a good thing, but deflation poses a major threat to Japan's fragile recovery. It is a familiar foe, plaguing Japan periodically since its "Lost Decade" in the 1990s.

Driven primarily by exports, Japan's economy grew at an annualized pace of 3.8 percent in the October-December quarter. But companies remain conservative with spending, focusing instead on cutting costs and rebuilding profits. In trying to lure customers as wages shrink, big retailers are slashing prices to new lows.

Chiyoda Co, a nationwide chain of shoe stores, on Friday began selling private label shoes for 990 yen ($10.65), undercutting rivals. Last week, Fast Retailing Co. said it would cut prices on T-shirts and sportwear. T-shirts that cost 790 yen last year will be sell for 490 yen ($5.30). Aeon Co. is offering suits for 7,800 yen ($84) in a 10-day campaign until March 30.

Such deals are helping underpin consumer demand for now, said Takuji Aida, senior economist at UBS Securities Japan. Any short-term benefit, however, will fade under expectations for prolonged deflation.

"Consumers would likely delay their purchases of durable consumer goods and other assets," Aida said in a report. "Companies would probably cut capex and employment, and pay back debts. Total demand would decline, and the stock market would probably weaken."

Although Japan's central bank has said it does not tolerate deflation, it predicts prices to head south for the next couple of a years. Last week, the Bank of Japan policy board expanded a short-term lending program amid growing political pressure to do more to fight deflation.

The government itself has little room to counter deflation with increased spending. Its ballooning debt is already the highest among industrialized countries and rising. Lawmakers on Wednesday passed a record $1 trillion budget for the next fiscal year starting April. To fund it, the country will issue a record 44 trillion yen in bonds.

February's broad-based deflation stemmed from lower prices on food, utilities, household goods and recreation.

Preliminary data show that core CPI for the Tokyo area, a barometer of price trends nationwide, retreated 1.8 percent in March.

[Associated Press; By TOMOKO A. HOSAKA]

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