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Updated Wednesday, November 18, 2009 10:56 am TWN, By Jason Clenfield and Tatsuo Ito, Bloomberg

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Japan deflation concern rises even as growth getting faster

Even after seven months of gains in factory output, about one third of Japan's factories sit idle. The Democratic Party of Japan took power in September pledging to support households that have endured 16 months of wage declines and unemployment that climbed to a record in July.

“The biggest worry to us is that consumption growth has been too strong relative to incomes,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo, who used to work at the central bank.

A price war over jeans is a sign of that fragility. Discount retailer Don Quijote Co. last month started selling jeans for 690 yen (US$7.70), undercutting Aeon Co., Japan's largest supermarket chain, which has been offering them for about US$9. Fast Retailing Co., the operator of Uniqlo stores, started the battle in March with pairs at US$11.

“Japanese domestic demand is still dependent on price declines to grow,” said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.

Without adjusting for prices, Japan's economy shrank an annualized 0.3 percent last quarter, the sixth straight contraction. The Democratic Party of Japan has signaled that these nominal figures will play a greater role in its policymaking.

“There's been a tendency to focus on the price-adjusted figures,” Keisuke Tsumura, one of the DPJ's top economic officials, said in an interview this month.

The government's heightened concern about deflation may put it at odds with the Bank of Japan. While the central bank last month forecast prices will keep falling through the year ending March 2012, Governor Masaaki Shirakawa has said deflation is unlikely to weigh on economic growth.

The central bank won't have room to raise the benchmark interest rate from the current 0.1 percent until at least the end of 2010, according to 15 of 16 analysts surveyed by Bloomberg News last month.

Still, most analysts said Monday's report suggests Japan will avoid a double-dip recession. Domestic demand, which includes consumer spending and business investment, contributed two-thirds of the country's growth last quarter. In the previous three months, exports led the economy's first expansion in more than a year.

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