Japan's Wholesale Inflation Slows for Third Month

Oct 12, 2007 - Japan's wholesale inflation slowed for a third month in September as financial-market turmoil triggered by a U.S. housing slump damped commodity prices and strengthened the yen, making imported materials cheaper.

The producer price index climbed 1.7 percent from a year earlier, extending 3 1/2 years of gains and following a revised 2 percent advance in August, the Bank of Japan said in Tokyo today. The median forecast of 34 economists surveyed by Bloomberg News was for a 1.9 percent increase.

Economists say it's unlikely that producer prices will keep slowing, given that the Japanese currency has since weakened and commodities have rebounded. Yamazaki Baking Co. Japan's largest bread and pastry maker, this week said it would raise prices for the first time in 17 years to cope with higher wheat costs.

"Japan's corporate goods prices will stay on a moderate upward trend," said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo and a former central bank official. "As long as the global economy keeps expanding at the current solid pace, demand for energy and raw materials will stay strong."

The yen traded at 117.20 per dollar at 3:11 p.m. in Tokyo from 117.39 before the report was published. Japan's currency has weakened 2.5 percent against the dollar in the past month.

The Japanese economy is ``steadily advancing to the end of deflation,'' Economic and Fiscal Policy Minister Hiroko Ota said.

Food Prices

The government is closely monitoring the effect of recent increases of food prices on households, Ota told reporters. Policy makers are also watching whether small companies can pass rising costs on to clients and protect their profits, she said.

Marudai Food Co. said this week that it will raise prices of its ham and sausages, following rivals Nippon Meat Packers Inc. and Itoham Foods Inc.

Instant-noodle makers Nissin Food Products Co., House Foods Corp. and Sanyo Foods Co. announced price increases last quarter. Global wheat prices have almost doubled in the past six months as adverse weather lowered harvests. The government raised the price of the grain it sells to millers by 10 percent this month.

Wholesale price gains have yet to translate into consumer inflation in the world's second-largest economy.

Core consumer prices, which exclude fresh food, declined 0.1 percent in August from a year earlier. They haven't risen this year. Even so, the wave of price increases for food and household goods is influencing consumers' expectations of inflation, Bank of Japan Governor Toshihiko Fukui said.

Inflation Perceptions

"Though the consumer price index hasn't moved an inch, consumers' inflation perceptions may be changing," Fukui told reporters yesterday. "Their perception is an important factor, and we need to make a policy judgment by reflecting it."

Core consumer prices will increase 'before long' and inflationary pressure 'is mounting gradually,' he said.

The Bank of Japan yesterday kept the key overnight lending rate at 0.5 percent, the lowest in the industrialized world, as policy makers sought more time to assess the effect of the U.S. subprime-mortgage crisis on global economic growth.

Eleven of 31 economists surveyed by Bloomberg News forecast a rate increase by the end of the year.

The central bank's overseas commodity index of 16 raw materials, which includes crude oil, nonferrous metal and steel, soared 23.2 percent in September from a year earlier, the fastest gain in almost a year, according to the central bank.

Small Companies

Small companies, which have less price-setting power than large companies, are struggling to pass energy and material costs to clients and that's eroding their sentiment and profits.

Confidence at small manufacturers and service providers fell in September, according to bank's quarterly Tankan business survey. They estimated profits would drop this fiscal year, a reversal from the growth in income forecast three months earlier.

"Pass-through of costs is happening only among companies that have pricing power," said Yoshimasa Maruyama, a senior economist at BNP Paribas Securities in Tokyo.

Economy Minister Ota said the inability to raise prices may hurt small businesses and the Tankan indicated such concerns.

"Most important is that the economy keeps recovering, and that the recovery of corporate profits spreads to small companies and helps to raise wages," she said.

From a month earlier, Japan's producer prices fell 0.1 percent, the central bank said.

The central bank plans to reshuffle the producer-price index in December and release data using the revised method on Dec. 12, the bank said today.

The revision may lower the index, said Azusa Kato, an economist at BNP Paribas Securities Japan Ltd. in Tokyo.