Deflation risks in China, Japan as demand slumps

Deflation risks in China, Japan as demand slumps

By Simon Rabinovitch and Hideyuki Sano

BEIJING/TOKYO, Dec 10 (Reuters) - Deflationary fears spreading over the global economy are crashing into Asia's manufacturing base as data on Wednesday showed a sharp slowdown in wholesale price growth in the region's top two economies, Japan and China.

Recessions in developed economies spawned by the financial crisis have whipsawed policy makers from battling upward cost pressures during the middle of the year to what is now a dire drop in prices, reflecting rapidly vanishing business and consumer demand.

Annual producer price inflation in China, Asia's second-biggest economy, collapsed for the third consecutive month to 2 percent in November, well down from October's reading of 6.6 percent. [ID:nPEK42337]

In Japan, which only emerged from a decade of falling prices in 2005, annual growth in factory-gate prices slowed rapidly in November to a one-year low of 2.8 percent from 5.0 percent in October. [ID:nT33767]

"The situation is quite severe. We are slipping into a deflationary recession risk pretty fast," said Isaac Meng, an economist with BNP Paribas in Beijing.

Global demand is weakening sharply with major markets including the United States, Japan and the euro zone all in recession.

China's growth is expected by the World Bank to slide in 2009 to 7.5 percent, below a level of 8 percent widely regarded as the minimum needed to absorb millions of people entering the work force each year. It expanded 11.9 percent in 2007.

LOOKING TO CONSUMER PRICE DATA

A drop in crude oil prices of more than $100 a barrel since a peak in July was a big factor putting pressure on prices in both China and Japan.

China, celebrating the 30th anniversary since the launch of reforms that opened its economy to the world, recently overhauled its domestic fuel pricing system, pledging to ease back on subsidies beginning next year.

Analysts said that if domestic fuel prices had been completely decided by the market last month, then producer prices would almost certainly have fallen.

For a graphic of the PPI, please click on: here

Consumer inflation figures for November, due on Thursday, are likely to underscore the dramatic retreat in price pressures as energy and commodity costs slide and domestic demand weakens in tandem with the global economic downturn.

The consumer price index is expected to have risen 3.0 percent from a year earlier, a marked reduction from a near 12-year high in February of 8.7 percent, a Reuters poll shows.

"We expect prices to decline further as external demand remains weak and surplus goods are targeted at the domestic market," Jing Ulrich, chairman of China equities with JPMorgan in Hong Kong, said in a note.

DEFLATION NATION?

Japanese machinery orders from foreign operators dived 37.2 percent in October, the second-largest fall on record, showing how the implosion in global markets since mid-September has disrupted economic activity around the globe.

Corporate investment has driven Japan's growth in recent years but is expected to slow now that major exporters such as Sony Corp (6758.T: Quote, Profile, Research, Stock Buzz) are curbing production and cutting jobs to cope with a global downturn. [ID:nT7887]

"In anticipation of a sharp fall in U.S. demand, Asian manufacturers, including subsidiaries of Japanese firms, are reducing production at an unprecedented pace," said Hideo Kumano, chief economist at Dai-ichi Life Research.

Policy makers continued to offer sobering assessments of their respective economic outlooks while firing every fiscal and monetary weapon to protect against the global recession.

The Japanese government is likely to issue its bleakest assessment of the economy in nearly seven years this month, downgrading its official view to say conditions are worsening, the Yomiuri newspaper reported on Wednesday.

Some economists speculate that the Bank of Japan may have to cut interest rates again by the end of its fiscal year in March.

However, swap contracts on Japan's benchmark rate -- already a slight 0.3 percent -- reflect a 20 to 30 percent chance of a 25-basis-point cut early next year.

The remarkable slackening of inflation in China, which Beijing declared the top economic problem at the start of the year, has given policy makers room to cut interest rates and focus fiscal efforts on the economy.

However, with China already having slashed rates and announced a 4 trillion yuan ($580 billion) stimulus package, concern is turning to whether these measures may prove too little, too late.

"Although various nations have rolled out stimulus policies, I think it is still too early for them to produce desirable effects," Zhang Yongjun, senior economist at the State Information Centre in Beijing, said.

In a rare bright spot for economic news, a survey in Australia showed a surprise jump in consumer confidence, a sign that falling interest rates and fuel prices, combined with fiscal stimulus, are having an affect.

Whether that cheer will translate into actual spending is unclear.

(Writing by Kevin Plumberg; Editing by Neil Fullick)

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