A worker assembles a Toyota Motor Corp. vehicle on the production line of the company’s Tsutsumi plant in Toyota City, Aichi Prefecture.

Hopes for recovery in the Japanese economy were dented Wednesday as data showed wholesale price falls at their sharpest in over 22 years, signaling a return to deflation, while machine orders also dived.

The fall suggested it is “still too early for recovery in the quarter” to June, said Macquarie Research economist Richard Jerram, adding that overseas demand for Japan’s exports needed to pick up first.

Naoki Murakami, chief economist at Monex, Inc., agreed that despite market hopes for a rebound, “the Japanese economic recovery still needs time.”

Japanese wholesale prices, meanwhile, dived 5.4 percent in May from a year earlier - the biggest drop since March 1987 when prices also tumbled 5.4 percent - and worse than a market forecast of a 5.1 percent fall.

It was the fifth straight month of year-on-year declines and steeper than a revised 4 percent drop in April.

The data raised fears Japan will fall back into deflation, a decline in prices that hurts companies and leads consumers to delay spending in hopes of further price drops, dampening economic activity.

The country was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, leaving it mired in a long recession and prompting the central bank to slash interest rates to almost zero.

But Bank of Japan Governor Masaaki Shirakawa said key economic indicators - such as industrial output and gross domestic product - would likely improve in the second quarter.

The central bank at its May policy-setting meeting upgraded its overall economic assessment for the first time in nearly three years, saying that Japan’s “exports and production are beginning to level out.”

Credit Suisse also said in a client note that it expects “orders in the manufacturing sector to gradually recover towards summer.

“The sentiment in the global manufacturing sector is recovering at a fast pace to the level of last autumn,” it said.

However, the central bank chief, speaking to a parliamentary panel, added that the effects of the sharp economic downturn would likely start to affect consumption and capital expenditure.

The world’s number two economy has been hit hard by the global downturn that has cut deep into its auto, electronics and other exports, driving up unemployment at home and depressing prices.

Prices have been pushed down in part because global energy costs have fallen from their highs of a year ago, a central bank official said.

Crude hit a record near US$147 a barrel in July last year but plummeted as the global crisis set in, falling back to around $30 earlier this year. Prices have begun to recover but only broke back above the $70 barrier again on Tuesday.

But a Bank of Japan official noted corporate goods prices also fell monthon-month, by 0.4 percent, the ninth straight month of such declines, indicating Japan’s worst post-war recession was also driving down prices.

The official said that even though commodity prices have been recovering, “the domestic economy is so weak that companies can’t raise their prices.”

“We cannot say whether the Japanese economy as a whole has entered a new bout of deflation,” the official told AFP. “As far as corporate goods prices are concerned, however, they are falling very rapidly.”

Source: AFP