Japan Facing Tough Times, Europe Not Far Behind

  Deflation is once again stalking Japan as consumer prices failed to rise for a second month in a row in February, while retail sales fell by a worryingly large 5%-plus from January.Prices excluding fresh food were unchanged last month from the same month in 2008, according to the government's statistics bureau in Tokyo.The economy is sinking, industrial production and exports are plunging, and retail sales slide as consumers refuse to spend, an early symptom of deflation and a situation the Japanese have been through at least twice in the past 20 years.Japan's retail sales were down 5.8% in February from the same month of 2008 after being down 2.4% in January. That was far steeper than the 3% forecast in a Bloomberg survey and the biggest drop in seven years.Other figures showed Japanese wages fell for a third month in a row, with overtime down 15%.The export and output falls hasn't seen job losses of the scale seen in the US, where the unemployment rate is 8.1%.Japan's jobless rate has risen only 0.3% to 4.1% since the recession deepened in October. & #160;And those have been temporary contract workers. Full time employees haven't been sacked yet and Japanese companies have cut working days, hours and weeks, but kept full timers on payrolls.But if the slide continues for much longer, they will have to start cutting permanent employees. It's a situation similar to that in Germany.The Japanese financial year ends on Tuesday and from Wednesday there will be a whole new outlook for the corporate sector. & #160;Already some big companies in the electronics, consumer products, car making and heavy industry sectors have been reported as speculating of further cuts in employment levels in the new financial year.This week's Tankan survey from the Bank of Japan will give a clue to future intentions: it's a business confidence and sentiment survey and some forecasters say it will be the worst of its kind for over 30 years.But deflation is the most immediate concern. & #160;Having been through two episodes in two decades, you'd think the Japanese policy making area would know what to do, but once again they seem to be frozen by the prospect, although the Bank of Japan has started on a version of Quantitative Easing to try and help banks lend.That has been tried before and the banks just sat on the money as they recapitalised and rebuilt balance sheets.During Japan's last bout with deflation that began a decade ago, bankruptcies surged and the jobless rate advanced to a postwar high.Bloomberg says Bank of Japan policy makers, who are predicting a two-year bout of falling prices starting in April, are watching whether inflation expectations by consumers and companies will fade, according to minutes of their February board meeting.Japanese wholesale costs and corporate service prices both dropped in February.The high yen is choking off price pressures and adding to the lower level of commodity prices, as well as crushing exports and margins.The only hope for Japan in the short term (the government process is stuffed and crippled by incompetence and scandal) is that Japanese investors rediscover their taste for cheap overseas investments and re-engage in the carry trade, where they sell the low yielding yen for higher yielding investments in places like Australia. & #160;That in turn would be bad news for us as it would lower the about to fall returns from major export contracts.In Europe on Friday there was similar gloomy news on the economies of the US and the eurozone.UK gross domestic product fell 1.6% from the third quarter, exceeding the earlier estimate of 1.5%. It's an annual rate of around 6.2%, very close to the US fall of 1.6% and 6.3% annual in the 4th quarter. (Japanese's was minus 3.2% in the 4th quarter alone and over 12% on an annual rate.)At the same time the slow down in the eurozone countries appears to have deepened in the first quarter of the year following a collapse in manufacturing orders in January.Orders fell 3.4% in January from December (which was weak) and were down a stunning 34.1% on the same month of 2008.On the plus side, unlike the UK (where inflation bounced to an annual rate of 3.2%) inflation in the 16-member zone is weaker than expected, according to a survey on Friday. & #160;The official figure for January is released this week. It will be around an annual rate of 1.2%.The latest gloomy data adds pressure for the European Central Bank to lower interest rates when governors meet on Thursday. Inflation isn't a concern, so the way is open for a cut by up to 0.50%.In America consumer spending slowed in February and their confidence remained near a three-decade low this month.But the small rise in spending was seen as another glimmer of good news: it rose 0.2% after climbing a revised (upwards) 1% in January.The Reuters/University of Michigan final index of consumer sentiment was 57.3 in March after a reading of 56.3 in February.Taken together economists said the rise in spending came on top of two months of positive retail sales. & #160;Consumers ran down their savings a fraction in February, but that was due to a fall in income in the month, which was probably the most significant part of the report from the US Department of Commerce.The Irish economy imploded in the 4th quarter of 2008, with growth falling a massive 7.1% (or around 28% at an annual rate). That's getting towards Depression levels.France's economy contracted the most in more than three decades in the 4th quarter, with growth down 1.1% from the third quarter (when it fell 0.2%).The fall was the biggest since the final quarter of 1974.And the 30 member economies of the OECD will contract 4.2% this year, according to a report to be issued this week.The Organisation for Economic Co-operation and Development Secretary General Angel Gurria said at the weekend that & quot;This is a financial crisis that became an economic crisis that's becoming a massive jobs crisis that will become a human crisis & quot;.He said unemployment rates in Europe and the US will & quot;head toward & quot; 10%.The latest OECD forecasts will be released on March 31. Previously, the Paris-based grouping of the world's most industrialized countries was predicting a 0.3% contraction for this year.The IMF says global growth will shrink by between 0.5% and 1% this year, with advanced economies contracting by 3%- 3.5%. & #160;  

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