WRAPUP 1-Deflation risks in China, Japan as demand slumps

By Simon Rabinovitch and Hideyuki Sano

BEIJING/TOKYO, Dec 10 (Reuters) - Deflationary fears spreading over the global economy are crashing into Asia's manufacturing base as data on Wednesday showed a sharp slowdown in wholesale price growth in the region's top two economies, Japan and China.

Recessions in developed economies spawned by the financial crisis have whipsawed policy makers from battling upward cost pressures during the middle of the year to what is now a dire drop in prices, reflecting rapidly vanishing business and consumer demand.

Annual producer price inflation in China, Asia's second-biggest economy, collapsed for the third consecutive month to 2 percent in November, well down from October's reading of 6.6 percent. [ID:nPEK42337]

In Japan, which only emerged from a decade of falling prices in 2005, annual growth in factory-gate prices slowed rapidly in November to a one-year low of 2.8 percent from 5.0 percent in October. [ID:nT33767]

"The situation is quite severe. We are slipping into a deflationary recession risk pretty fast," said Isaac Meng, an economist with BNP Paribas in Beijing.

Global demand is weakening sharply with major markets including the United States, Japan and the euro zone all in recession.

China's growth is expected by the World Bank to slide in 2009 to 7.5 percent, below a level of 8 percent widely regarded as the minimum needed to absorb millions of people entering the work force each year. It expanded 11.9 percent in 2007.

LOOKING TO CONSUMER PRICE DATA

A drop in crude oil prices of more than $100 a barrel since a peak in July was a big factor putting pressure on prices in both China and Japan.

China, celebrating the 30th anniversary since the launch of reforms that opened its economy to the world, recently overhauled its domestic fuel pricing system, pledging to ease back on subsidies beginning next year.

Analysts said that if domestic fuel prices had been completely decided by the market last month, then producer prices would almost certainly have fallen.

For a graphic of the PPI, please click on: here

Consumer inflation figures for November, due on Thursday, are likely to underscore the dramatic retreat in price pressures as energy and commodity costs slide and domestic demand weakens in tandem with the global economic downturn.

The consumer price index is expected to have risen 3.0 percent from a year earlier, a marked reduction from a near 12-year high in February of 8.7 percent, a Reuters poll shows.

"We expect prices to decline further as external demand remains weak and surplus goods are targeted at the domestic market," Jing Ulrich, chairman of China equities with JPMorgan in Hong Kong, said in a note.