Japan Consumption, Inflation Reports Stoke Recession Concern
By Mayumi Otsuma and Toru Fujioka
June 27 (Bloomberg) -- Japan's household spending slumped, job vacancies fell to a three-year low and the inflation rate almost doubled, signaling that the economy's longest postwar expansion may be over.
Stocks fell and bonds rose on concern that record crude oil prices will damp demand for Japan's cars and flat-panel televisions. The risk of a recession will probably prevent the Bank of Japan from raising its benchmark interest rate from 0.5 percent even as inflation accelerates worldwide.
``We're clearly seeing that the household sector is being severely damaged by the weaker job market and rapid inflation,'' said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. ``Japan's economy is likely to contract in the second quarter.''
Household spending declined 3.2 percent, the most since September 2006, the statistics bureau said. The ratio of jobs for each applicant slid to 0.92. Core consumer prices, which exclude fruit, fish and vegetables, climbed 1.5 percent from a year earlier after rising 0.9 percent in April.
The government downgraded its assessment of industrial production even after a report today showed output rose 2.9 percent from a month earlier, the first increase in three months. Production is showing signs of weakness because of higher energy costs and weakening global demand, the Trade Ministry said.
The Nikkei 225 Stock Average tumbled 2.2 percent as of 9:54 a.m. in Tokyo. The yield on Japan's 10-year bond fell 4.5 basis points to 1.61 percent. The yen traded at 106.90 per dollar from 106.88 before the reports were published.
Bank of Japan
``With the economy slowing, the central bank cannot raise interest rates anytime soon,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp.
Oil prices have doubled in the past year, and surged to a record $140.39 a barrel yesterday. Higher energy and raw- materials costs will drag large manufacturers' confidence to the lowest level in almost five years, economists predict the Bank of Japan's Tankan business survey to show on July 1.
First-quarter profits fell at the fastest pace since the economy emerged from its last recession in 2002.
Honda Motor Co., Japan's second-largest carmaker, said yesterday its domestic output and exports both fell 12 percent last month because of slower sales in the U.S. and the U.K.
Higher prices for steel, rubber and aluminum have increased production costs at companies including Nissan Motor Co. Those costs are ``practically impossible to absorb,'' Nissan's Chief Executive Officer Carlos Ghosn told shareholders this week.
Outlook `Uncertain'
Japan's economic outlook is increasingly ``uncertain,'' central bank policy board member Seiji Nakamura said yesterday, citing the risk of slower global growth and the increase in energy and raw-materials costs. The bank is concerned higher prices may cause businesses and consumers to spend less, he said.
``Today's economic data pointed to growing risks of stagflation,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``Japan's economy may fall into a recession.''
Higher food and fuel costs are forcing companies to raise prices that aren't being accepted by consumers.
Yamazaki Baking Co. and Nisshin Seifun Group Inc. raised prices of bread, cakes and pasta this year because of higher wheat costs. Consumers spent 5.9 percent less on bread and 6.1 percent less on pasta in May after makers raised prices, the statistics bureau said.
Prices of daily necessities are climbing faster than wages, causing consumer sentiment to plunge to a six-year low in May. The unemployment rate stayed at 4 percent last month, the government said today.
``With profits being increasingly squeezed, there's no room for companies to raise wages anytime soon,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.
To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
Last Updated: June 26, 2008 21:02 EDT
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