UPDATE 3-Japan's Machinery Orders Tumble, Deflation Looms


Japan's core machinery orders fell a record 16.2 percent in November as companies slashed spending in the face of a global economic slump and a growing risk of a return to deflation at home.

Data also showed growth in wholesale prices slowing to a four-year low in December and companies charging each other less for final consumer goods than a year earlier.
"Wholesale inflation is slowing now mainly due to declines in raw material costs. Weak demand may add to the downward pressure on prices in the months ahead," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"There's a good chance wholesale prices will start falling year-on-year sometime in the January-March quarter."
The drop in core private-sector machinery orders, a leading indicator of corporate capital spending, was double the median market forecast for an 8.1 percent fall and bigger than the previous record decline of 15.9 percent in July 2006.
The value of core orders was the lowest since July 1987 at 754.2 billion yen ($8.5 billion).
The global slowdown has hit Japanese factories hard, with big firms such as car maker Toyota Motor Corp and electronics firm Sony Corp slashing output and jobs, deepening the recession in the world's No.2 economy.
Falling oil and other commodity prices have eased costs for Japanese firms, but have stoked fears that price falls and weak demand could feed each other in a vicious deflationary spiral.
The final price companies charge each other for goods fell 2.6 percent from a year earlier, a rough guide to likely pressure on prices in stores, and some see consumer inflation turning negative.
"I think core consumer prices will fall this year. It's going to start falling by the middle of year at latest," said Seiji Adachi, a senior economist at Deutsche Securities.
The weak machinery orders data pushed up the lead 10-year Japanese government bond futures to a four-month high of 140.19. The Nikkei share average fell 4.9 percent to a 1-month closing low as the grim data dented investor confidence.
The meltdown of global financial markets has pushed the United States, Japan and the euro zone into recession and slowed growth in China and other emerging economies.
Many economists expect Japan's export-reliant economy to keep shrinking at least until the first quarter this year -- four consecutive quarters of decline and the longest such slide on record -- as manufacturers cut output as global demand plunges.
A Japanese newspaper reported on Thursday that the Bank of Japan will examine the possibility of buying corporate bonds outright to ease credit strains.
But many economists doubt the BOJ will take such steps immediately after rates on commercial paper slid following its rate cut and announcement last month that it would buy such paper. The BOJ's policy board next meets on Jan. 21-22.
Deepening economic troubles are expected to prompt the European Central Bank to cut interest rates on Thursday for the fourth month running.

Fuelling worries among some economists that deflation could return to haunt the economy, annual wholesale inflation slowed to 1.1 percent in December, above a median market forecast for 0.9 percent but less than half the 2.8 percent rise seen in the year to November.
It was the lowest level of wholesale inflation since May 2004 and prices fell sharply in the month, prompting some analysts to warn that deflation in wholesale prices loomed.
The index on domestic final consumer goods, sometimes seen as a proxy to consumer price trends, fell 2.6 percent in December from a year earlier.
Japan began suffering mild deflation from 1998, with some economists saying it ended in 2006 due to a recovery in the economy. But the economy slipped into recession last year.
While many economists expect core consumer prices to turn negative in the coming months, few see a return to prolonged deflation.

Source: Reuters
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