Deflation, sagging exports dog Japan’s recovery

Consumer prices in Japan extended their decline for an 18th straight month.

The core consumer price index, which strips out volatile fresh food prices, fell 1 percent in August from a year earlier. That compares to a decline of 1.1 percent in July. “You’ve seen deflation pressure easing slightly for the past 12 months,” said Richard Jerram, chief economist at Macquarie Securities in Japan. “But it’s still a big problem.” Analysts say the country may remain mired in deflation because of the strengthening yen. A stronger yen is making imports cheaper to buy, giving retailers an incentive to lower prices in order to attract more customers.The yen’s rise has also been weighing heavily on Japan’s big exporters and undermining the country’s fragile recovery. An earlier report showed exports have been slowing for six straight month, mainly because a stronger yen and weakening overseas demand. Despite the uncertainty, the country’s labor market has been showing signs of improvement. The jobless rate slipped to 5.1 percent in August from a previous reading of 5.2 percent. The reading was inline with expectations. Last week the government said it was planning to introduce a supplementary budget of about $55 billion to pay for a new stimulus plan.

Jerram described the measures as nothing more than smoke and mirrors and won’t have the impact needed to stimulate domestic demand. Part of the problem, he says, is Japan’s reliance on exports to boost growth rather than dealing with its domestic troubles, which is what’s needed to turn the economy around. “The government is struggling for good ideas on how to stimulate growth,” said Jerram – CNN