Japan wholesale prices slide, deflation ahead

TOKYO (Reuters) - Japanese wholesale prices are falling at their fastest rate since 2002, March figures showed on Monday, as weakening domestic demand on top of falling commodity prices drives Japan toward its second bout of deflation this decade.

With interest rates already almost at zero, analysts say the Bank of Japan has limited weapons to fight deflation in the country's worst recession since World War Two to fight deflation.

"The BOJ has reached its limit in terms of conventional monetary policy moves," said Norihiro Fujito, general manager at Mitsubishi UFJ Securities.

"If prices continue to slide, the BOJ may need to expand its purchases of government bond buying, and move toward quantitative easing. It may also broaden the scope of corporate bonds it buys, relaxing its standards on credit ratings, for example."

The 2.2 percent annual decline in wholesale prices was bigger than a median market forecast for a 1.8 percent decrease, Bank of Japan data showed. JPCGPY=ECI

It followed a revised 1.6 percent fall in the year to the February and was the third month in a row of annual decline.

Analysts say it is inevitable that consumer prices will soon turn negative after flat annual figures for the years to January and February.

March figures are due at the end of the month.

Overall final goods prices, which track prices of final products charged to businesses, fell 2.6 percent in March from a year earlier. Domestic final goods prices fell 1.7 percent.

Wholesale inflation quickly lost steam after hitting a 27-year peak in August, as the worsening global financial crisis sent the price of commodities tumbling.

Now, with both domestic and external demand faltering, Japan could be the slowest among major economies to recover from recession even as the government scrambles to pull the economy out of the deepening recession.

"Even though there have been some positive signs on the economy recently, today's data showed prices are under pressure from a widening output gap," said Junko Nishioka, chief Japan economist at Royal Bank of Scotland.

"Pressure on consumer prices will be strong at least for the first half of this year."

Japan's economy tumbled 3.2 percent in the last quarter of last year and plunging business confidence has raised fears the situation is getting worse.

The world's No.2 economy has been more severely hit by the global recession than other major economies due to its heavy dependence on exports.

Japan's government on Friday announced new stimulus spending of 15.4 trillion yen ($154 billion), equivalent to 3 percent of GDP, to help lift the country out of its deepest recession since World War Two.

($1=100.22 Yen)