Japanese economy hit by ‘double nightmare’

Leo Lewis, Asia Correspondent

With potentially the most momentous general election for five decades less than 48 hours away, the Japanese economy has plunged into the double nightmare of runaway deflation and soaring joblessness.

The Japanese unemployment rate hit a record 5.7 per cent in July, although many analysts believe that the official number massively understates the true extent of joblessness.

Many believe that the Government’s calculation methods, which do not count people not actually looking for work, may disguise a figure twice the official size.

Nomura analysts have warned of Japan’s huge hidden jobless problem, and of the likelihood that the extent of the crisis may emerge over coming months and years.

In one potential scenario, Takehide Kiuchi, the bank’s economist warned, Japanese unemployment could reach 12.2 per cent as companies shed their giant armies of surplus labour.

Two reports today — the July unemployment numbers were accompanied by the latest consumer prices index — paint an especially dismal picture of the world’s second-biggest economy only days after official GDP numbers showed Japan crawling out of technical recession.

Consumer prices nosedived by 2.2 per cent year-on-year in July — the most acute fall they have registered, surpassing even the falls logged during the country’s notorious five-year struggle with deflation that began in the late 1990s.

Takuji Aida, a UBS economist, said that although the price declines were largely the product of falling energy prices, the core figures reflected weak demand in the service sector and that the trend would make a hefty impact on employment trends.

Fear of yet more rounds of job cuts have crept across the entire Japanese economy. Toyota’s announcement this week that it would permanently close one of its domestic car production lines confirmed, for many, that those worries were justified.

The effect of that fear has been for households to make abrupt cuts in their spending: cheap clothing stores and discount food wholesalers have enjoyed surging sales, while the mainstream of retail has taken a heavy beating.

Although Japan broke free of its long cycle of economic contraction in the most recent quarter, few believed that it was yet time to celebrate a recovery.

Although the stock market continued a long rally, many economists warned that trading-floor euphoria was not a reflection of Japan’s true prospects and that falling prices would exact the same heavy toll they did during Japan’s last phase of deflation. (Leo Lewis, The Times) http://business.timesonline.co.uk/tol/business/markets/article6813214.ece

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