Japanese prices slide, Swiss bank UBS seeks cash

TOKYO/ZURICH (Reuters) - Japanese consumer prices fell at a record pace while Swiss authorities, who also face a threat of deflation, got some possible relief from their other headache when banking giant UBS sought to raise new capital.

In the euro zone, which policymakers insist has no serious risk of deflation, early data suggested that German inflation will hover around zero this month.

Deep in the economic crisis, financial markets are fretting that some governments may eventually reignite inflation with their huge injections of money to revive growth.

Simultaneously others, notably in Japan and Switzerland, are fighting to prevent a downward spiral of prices which would inflict even more economic damage than runaway inflation.

Japan's nationwide core consumer price index fell 1.1 percent in May from a year earlier, the largest fall in records dating back to 1970, data on Friday showed.

The numbers were another sign of weakness in Japan's economy, and may mean the Bank of Japan extends support for the corporate finance market beyond a September expiry date, as well as keeping interest rates at super-low levels.

"Deflation is getting worse and underscores that the BOJ cannot move for a considerable time," said JP Morgan senior economist Masamichi Adachi.

In Switzerland consumer prices fell at the fastest pace in 50 years in May, and the central bank is waging war on deflation with a series of mostly unconfirmed market interventions to stop the Swiss franc rising, most recently on Thursday.

GOOD NEWS FOR SWISS NATIONAL BANK?

But the Swiss National Bank got what might turn out to be some good news from UBS, a global bank with global-sized problems which is the responsibility of authorities in a wealthy but small country.

UBS, one of the hardest-hit major banks in the financial crisis, said late on Thursday it planned to raise 3.8 billion Swiss francs ($3.46 billion) in a share sale to a few big institutional investors.

But in a sign that the world's largest wealth manager faces a long, hard recovery, it forecast a second-quarter loss, sending its stock lower on Friday as analysts said problems remained. UBS shares, which fell 6 percent on Thursday to 13.97 francs, were down 0.7 percent to 13.85 francs at 0912 GMT on Friday.

Kepler Capital Markets analyst Dirk Becker said the capital plan "closes the largest part of the 5 billion franc capital gap that we had identified for them." But he added: "We find it extremely disappointing that the bank suffered another loss, albeit apparently lower than the 2 billion franc loss for Q1."

PROBLEMS REMAIN

In the euro zone Germany's most populous state, North Rhine-Westphalia, reported that consumer prices have risen 0.3 percent month-on-month in June, giving an annual inflation rate of just 0.1 percent. This is an early signal of rates for the entire nation and the wider euro zone, to be published later.

Hopes for an eventual economic recovery supported stock markets on Friday, with metal and oil prices also rising. The U.S. dollar and government bond prices slipped as investors gingerly put funds back into riskier assets.

Tokyo's Nikkei average added 0.8 percent on Friday despite the consumer prices data. "Most people will agree now that we won't revisit the low point that we have seen this year again any time soon," said Luc Van Hecka, chief economist at KBC Securities.

"But there are still some problems to be resolved in the financial sector and as long as that is not out of the way in a convincing manner, we could still have intermediate corrections."

($1=1.099 Swiss francs)

(Writing by David Stamp; Editing by Mike Nesbit)