Japan deflation concern rises even as growth getting faster

The domestic demand deflator, a measure of price levels that excludes the cost of imports, fell 2.6 percent in the third quarter from a year earlier, the most since 1958, Cabinet Office figures showed Monday in Tokyo. At the same time, gross domestic product jumped 4.8 percent, the most since early 2007.

Sustained price declines threaten to curtail a corporate- profit rebound that's already been insufficient to spur a rally in Japan's shares this quarter. The report prompted Deputy Prime Minister Naoto Kan to say the government may outline an emergency-spending package as soon as Tuesday, adding that “I'm concerned we're entering into a deflationary situation.”

“This isn't sustainable growth and the government knows it — that's precisely why they're talking about the GDP deflator,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

A report Tuesday showed that demand for services unexpectedly fell for the first time in four months in September, a sign that the effects of government stimulus measures may be fading.

The tertiary index, which captures 63 percent of the economy, slid 0.5 percent from August, the Trade Ministry said Tuesday in Tokyo. The median forecast of 23 economists surveyed by Bloomberg News was for a 0.2 percent gain.

Kan said Monday that the government should work with the Bank of Japan to tackle the price slump. The central bank has kept interest rates near zero to help rekindle growth.

Consumer prices in the world's second-largest economy have fallen for seven straight months, undermined by the deepest recession in the postwar era.

Deflation can undermine the economy by persuading companies and consumers to delay purchases in the anticipation of further price declines. It also increases the value of their debt.

“Deflation is great if you don't have debt,” Nishioka said. “But debt drives most economic activity. Companies take out a loan to build factories or you get a mortgage to buy a house. Those burdens get heavier when incomes start to fall.”

The yen's 6 percent gain against the dollar in the past three months has exacerbated the price slump by making imports cheaper.

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