Japan’s consumer prices register steepest drop, slump continues

Japan’s consumer prices fell the fastest in more than a decade, while the  job market and retail sales remained subdued, data showed on Friday, raising the risks of a return to deflation as the COVID-19 pandemic hammers demand.

The world’s third-biggest economy recovered in the three months to September from its worst postwar contraction, but a third wave of the coronavirus infections threatens the economic revival. The Bank of Japan (BOJ)  unveiled a plan last week to examine more effective ways to achieve its elusive 2% inflation target.

The core consumer price index (CPI) for Japan’s capital, including oil products but excluding fresh food, fell 0.9% in December from a year earlier, the steepest drop since September 2010.

That was deeper than economists’ median estimate for a 0.8% fall and deepened from a 0.7% decline in November. The December drop was the fastest downturn since September 2010, when core consumer prices slumped 1.0%.

Nationwide data last week for November also showed the steepest price slump since late 2010.

“There is a chance that the nation will return to deflation due to the coronavirus pandemic,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Private demand is weak as people, especially older people, stay home to keep from getting infected, making it difficult for prices to rise.”

Japan’s seasonally adjusted unemployment rate fell to 2.9%, better the median forecast of 3.1%, government data showed. In October, the jobless rate stood at 3.1%.

There were 1.06 jobs per applicant in November, up from the previous month’s 1.04, labour ministry data showed, but still near September’s seven-year low 1.03.

The pandemic remained a drag on consumer spending, with a renewed spike in infections raising fresh risks for a weakened economy.

Japanese retail sales a moderate 0.7% in November from a year earlier, the second straight gain but slower than October’s 6.4% jump and below the median market forecast for a 1.7% gain.

Meanwhile, Japan’s industrial output likely grew for a sixth straight month in November in a sign of gradual recovery in factory activity, although a recent resurgence in COVID-19 infections clouds the outlook, a Reuters poll showed on Friday.

The trade ministry data due on Monday is likely to show factory output rose 1.2% in November from the previous month, slowing from a 3.9% gain in October, a Reuters poll of 17 economists showed.

Japan’s factory output has been recovering from a pandemic-related downturn earlier this year, bolstered by global demand for automobiles and IT-related goods as well as capital goods, but some analysts said the outlook was uncertain.

Takeshi Minami, chief economist at Norinchukin Research Institute said new virus infections in Europe and America have stalled economic activity there.

U.S. car sales are slowing and the Chinese economy’s recovery to its pre-pandemic growth path has run its course, which will put a lid on Japan’s factory output, he said.

“As such, Japan’s factory activity will seesaw in December and January,” he added.

The world’s third-largest economy has rebounded from the second quarter’s COVID-induced deep slump, lifted by rising exports and a pick-up in private-sector consumption.

However, analysts worry that a recent resurgence in coronavirus infections in Japan and elsewhere may keep any recovery modest.

Meanwhile, Japanese shares ended mixed in holiday-thinned trade on Friday but some investors bought pro-cyclical stocks that are expected to perform well next year as the global economy recovers from the coronavirus pandemic.

The Nikkei 225 Index ended down 0.04% at 26,656.61. The broader Topix rose 0.23% to 1,778.41.

Shares in the shipping, raw materials, and real estate sectors rose, while tech firms fell as overall activity was substantially thinned by the closure of many financial markets for Christmas holidays.

Sentiment was underpinned by Britain and the European Union securing a free-trade deal, and further soothed earlier in the week by U.S. lawmakers agreeing a $900 billion economic stimulus package.

The roll out of coronavirus vaccinations and expectations that interest rates will remain low for a prolonged period have also brightened prospects for equities next year.

“For policy and financial markets, a goldilocks scenario is likely to continue next year due to a gradual economic recovery and monetary easing,” Mizuho Securities said in a research memo.