JAPAN´S DEFLATION

The yen fell to a three-month low against the dollar and weakened versus the euro before government reports tomorrow that may show rising unemployment and falling consumer prices in Japan.

Was deflation ever really whipped in Japan ???

Its return, then, is hardly a surprise. And policy makers’ ability to fend it off remains doubtful. Japan and its companies are familiar with what this means: consumers delay purchases; real interest rates rise; earnings for all but the most defensive companies erode; and wages stagnate.

Because fuel prices spiked in 2008, the core consumer price index, which excludes volatile fresh food, rose 1.5%; not high by most standards. Now, economists are forecasting a clear resumption in deflation. Friday’s January core CPI is expected to slide 0.1% on year.

This time, adding to the downward spiral of prices and wages is a collapse in exports and the prospect for deflation to turn up in the U.S. and China. This makes a recovery in profits even more difficult.

As before, the Bank of Japan finds itself unable to react strongly with conventional methods; short-term interest rates are already near zero. Unconventional methods don’t sit well with the conservative BOJ.

Crucial to breaking the downward cycle is changing the expectation — among companies and shoppers alike — that prices will keep tumbling. On this front too the BOJ has already laid down its sword. Its own price-stability band, a range of acceptable price changes, starts at zero. That’s compared to a range of 1% to 3% for the BOJ’s peers.

And an administration struggling just to keep its grip on power offers little hope that it’ll be able to spur demand.