TOKYO, Sept 26 - Japanese consumer prices fell and retail sales dropped in August, the government said on Friday, showing the world's second-biggest economy still had a problem with deflation and weak consumption despite signs of improvement. A rise in the yen has added to concerns that a nascent export-led recovery may be short-lived, prompting the finance minister to issue a fresh warning about possible intervention. Japan's core nationwide consumer price index (CPI) fell 0.1 percent in August from a year earlier, the 47th straight month of decline. That was in line with economists' forecasts. The index, which excludes volatile prices of fresh food, rose 0.1 percent from July.
Some economists said the month-on-month rise and the slight annual decline suggested deflation was moderating, but others said special factors such as higher medical costs had affected the index in August. It would probably take longer for prices to show a convincing recovery, they said. "We're seeing special factors in play here. The actual, underlying trend is still a fall," Japan Research Institute economist Hisashi Yamada said. "Prices of clothes, food and durable goods are still declining." Stronger exports and capital spending boosted Japan's economy in the second quarter, helping it record an annualised growth rate of 3.9 percent in the April-June quarter, beating the pace of expansion in the United States. But economists say the economy may see slower growth, or even a contraction, in the third quarter as consumption slows. Retail sales data announced separately showed nationwide sales fell for the 29th straight month in August, dropping 2.0 percent from a year earlier. Sales at large stores fell 3.4 percent year-on-year on a same-store basis. Unseasonably cool and wet weather in August had probably kept customers away from the shops, economists said. They also pointed to a recent rise in the yen as a potential concern for the economy, since it tends to cut exporters' profits and make their goods less competitive abroad.
Newly appointed Finance Minister Sadakazu Tanigaki said the Japanese authorities could act to hold the yen down. "Recent moves in the yen have been sudden," he told reporters after a cabinet meeting. "We are watching closely and will take appropriate measures when necessary. Foreign exchange rates should reflect economic fundamentals." The yen was trading around 112 per dollar in mid-morning in Tokyo, little changed from Thursday's late New York levels but about one percent below three-year highs around 110.90 yen set on Tuesday. The yen had fallen to 112.28 per dollar in early trade after news of a series of strong earthquakes in northern Japan. Dealers attributed a drop in the Tokyo stock market to an overnight fall in Wall Street plus nerves after the quakes. The data had little impact on the stock market or other financial markets. Deflation is blamed for weighing down corporate profits and exacerbating debt and is cited along with weak consumption as one of the key hurdles to a sustainable recovery in Japan. The Bank of Japan has vowed to keep its ultra-easy monetary policy in place and flood the market with liquidity until the year-on-year change in the core CPI stabilises above zero. Tanigaki said he would work closely with the central bank to beat deflation.//