Japan's deflationary spiral: Wholesale prices plunge 8.5%

Posted Aug 12th 2009 12:00PM by Connie Madon
Filed under: International Markets, Market Matters, Japan, Economic Data

Markets throughout the world have been rallying on the expectation that the world recession is ending. Lurking underneath the surface are some disturbing events.

Japan is in a sharp deflationary spiral. The Corporate Goods Index, which measures wholesale prices, plunged 8.5%, this after a 6.7% drop in June. This is the fastest drop on record.

Let's look at other deflationary numbers. Import prices fell 33.3% in yen terms and 26.5% on a contract-currency basis. Export prices fell 15.3% in yen terms and 6.5% in contract currencies.

What this means is that Japan has had to drop prices in order to sell goods at export.

With import prices collapsing by a third, the economy of Japan is imploding at a rapid rate. Whether this will spread throughout Asia is unknown. China seems to be booming, but there again lending has plunged by 77% in recent weeks.

It is important to watch these developments closely because investors are looking to Asia to reignite world economies. Keep an eye on the Japanese stock market and the value of the Japanese yen.