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Japanese Economic Data Increase Deflation Fears
Wall Street Journal
By TAKASHI MOCHIZUKI
December 10, 2008

TOKYO -- Overseas orders for Japanese machinery dropped in October while deflationary pressure appeared to increase in the country's corporate sector, according to government data.

The figures suggest that the global slowdown could continue to cut into foreign demand for Japanese products as domestic demand in the world's second-largest economy remains stagnant. They also indicate that a sharp drop in world commodity and energy prices might bring deflation back to Japan's economy, possibly forcing its central bank to cut its policy interest rate lower than the current 0.3%.

Bank of Japan Gov. Masaaki Shirakawa, however, has sounded reluctant to cut interest rates further, saying that extremely low rates could cause problems for the functioning of the money market.

Toshihiro Nagahama, a senior economist at Dai-ichi Life Research Institute, said, "I expect that the Japanese economy will fall back into severe deflation in the next fiscal year" starting in April.

The Cabinet Office said overseas demand for Japanese machinery plunged 44% in October from a year earlier, the second biggest drop since the government started collecting such data in April 1987. A 47% drop in August 1998 was the largest ever.

Core October machinery orders decreased 4.4% month-to-month, in line with private economists' forecasts. Core figures exclude orders from electric power companies and shipping companies because of their volatility, and are an indicator of corporate capital investment trends.

Meanwhile, BOJ data showed that prices in November of domestically produced goods traded among Japanese companies fell at their fastest month-to-month pace since the central bank began the survey in 1960, brought down by a fall in raw material costs and a rising yen. A stronger yen reduces the cost of oil, food, metals and other commodities that Japan buys from overseas. The country purchases 60% of its food and nearly all of its oil from abroad.

The BOJ's corporate-goods-prices index fell 1.9% month-to-month in November to 107.9, following a revised 1.4% slide the previous month.

The index rose 2.8% from a year earlier, the 57th straight month of gains, but slower than the revised 5% climb in October.

The weak data Wednesday follow other gloomy signs. The government said Tuesday that real gross domestic product shrank more than expected in the July-to-September period, contracting 0.5% from the previous quarter rather than the 0.1% shrinkage that was initially calculated last month.

"Given a sharp downturn in raw materials prices world-wide, corporate goods prices will likely continue falling next year," said Takeshi Minami, chief economist at Norinchukin Research Institute. "Consumer prices may also decrease in the near term, and deflationary pressures will grow in Japan down the road, which in turn will prompt the BOJ to cut interest rates further."

Mr. Minami expects the central bank to slash its policy rate by 15 or 20 basis points, or hundredths of a percentage point, from an already low 0.3% before February as early as this month.

—Tomoyuki Tachikawa and Andrew Monahan contributed to this article.

Write to Takashi Mochizuki at takashi.mochizuki@dowjones.com

Original Text