Commodity Inflation Versus Asset Deflation

From Market Folly:

This is a Guest Post from Phil at Phil's Stock World

...Gee, we can’t afford health care, we can’t afford rising energy costs but people are buying stocks as if both industries have nowhere to go but up, despite lower demand and rising unemployment. I guess we can keep borrowing and borrowing and borrowing and borrowing to pay the ever-increasing prices projected by commodity futures and biotech multiples but one would think there’s a theoretical limit…

There’s a major disconnect going on between the markets and reality - perhaps it is end of quarter window dressing by financials and funds so desperate for a good quarter they will do anything to maintain the market for another 7 days . Just this morning the Nikkei was up 84 points despite the Dollar falling back below 96 Yen. That wasn’t even the bad news for Japan though: Inside the country, consumer prices fell at a record pace in May adding to the risk that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession. Prices excluding fresh food slid 1.1 percent from a year earlier after dropping 0.1 percent in the preceding two months, the statistics bureau said today in Tokyo. It was the sharpest decrease since comparable figures were first compiled in 1971.

“Profits fall, then wages come down, then consumers stop shopping,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “And because people aren’t shopping, companies lower prices. That’s the process that we’re starting to see. It isn’t easy to break out of.” Some 47 percent of 775 Japanese retailers surveyed by the Nikkei newspaper plan to lower prices in the year ending March 2010 to spur sales, up from 9 percent a year earlier. “With demand deteriorating, companies are finding it more difficult to sell goods and services and are turning to discounting,” said Azusa Kato, an economist at BNP Paribas in Tokyo.

I hope I didn’t give you the impression that THAT was Japan’s biggest problem though. Oh no, they’ve got much bigger fish to fry (or eat raw, as the case may be). While their CPI does the moon-walk, the London Times points out this morning:

Anaemic exports, a struggling domestic economy and a dramatic plunge in summer bonuses could cause Japan’s version of the sub-prime mortgage crisis to explode, a leading think-tank has warned....MORE