Deflation feared as wholesale prices dip

Wholesale prices in March dropped 2.2 percent from a year earlier for the sharpest fall in nearly seven years due to falling demand amid the weakening of the economy, the Bank of Japan said Monday, fueling deflation fears.

The prices, gauged by the BOJ's corporate goods price index, stood at 104.3 against the 2005 base of 100, the central bank said in a preliminary report.

The headline reading fell for the third consecutive month and marked the largest drop since May 2002. The decline was also greater than the average market forecast of a 1.7 percent fall in a Kyodo News poll of economic think tanks.

"The recent economic slowdown depressed final demand, contributing to price declines," a BOJ official said, referring to depressed prices for a variety of products, including petroleum products, salmon and beef, and plastic goods.

Contributing the most to the March wholesale price index's decline were falls of prices in the petroleum and coal products segment, down 34.6 percent from a year earlier, and those in the nonferrous metal category, down 30.5 percent.

Prices for agricultural and marine products dropped 4.4 percent as consumers tightened their purse strings especially for beef and other higher priced foods, and shifted to lower priced products.

While posting a 10.6 percent yearly rise, steel and iron prices have notably fallen on a month-on-month basis recently, logging a 1.8 percent drop in March followed by a revised 1.5 percent drop in February.

"Deflationary forces are expected to strengthen gradually hereafter, and it appears that the wholesale price index is heading toward a year-on-year drop of as large as 6 percent" by around September, said Kyohei Morita, chief economist at Barclays Capital Japan Ltd.

The fresh stimulus package involving record public spending adopted Friday will not be enough to halt the deflationary trend, Morita said, citing a deteriorating job market, which is likely to cause consumers to spend less and prices to decline further.

On a month-on-month basis, prices were down 0.2 percent from February, continuing to fall for the seventh straight month since September amid the deepening global financial turmoil. The reading matched a projection of a 0.2 percent slide in the Kyodo News poll.