Japan's Inflation Rate Probably Accelerated to 10-Year High

By Mayumi Otsuma

July 23 (Bloomberg) -- Japan's consumer prices probably rose at the fastest pace in a decade, discouraging households from spending and slowing economic growth.

Core prices, which exclude fruit, fish and vegetables, climbed 1.9 percent in June from a year earlier after rising 1.5 percent in May, according to the median estimate of economists surveyed by Bloomberg ahead of figures to be released July 25.

The Bank of Japan cut its growth forecast last week, saying record commodity costs are causing companies and individuals to cut spending. Governor Masaaki Shirakawa and his colleagues probably won't raise interest rates even if inflation exceeds 2 percent, the higher end of their range for price stability.

``Bank of Japan policy makers seem to be anticipating core prices will reach or surpass the top of the range, but they won't be prompted to act just because of that,'' said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. Any attempt to quell inflation by raising rates would erode growth, Kono said.

Core prices will probably climb 1.8 percent in the year ending March 2009, more than the 1.1 percent projected three months ago, the central bank said last week. The gauge of inflation will ease to 1.1 percent next fiscal year, it said.

Policy board members consider prices to be stable when they are between zero and 2 percent. The range isn't a binding target.

Record gasoline prices and rising food costs caused consumer sentiment to plunge to the lowest level in at least 26 years last month. Households reduced spending for a third month in May as prices of daily necessities climbed 2.4 percent, three times the pace of wage growth.

Slower Growth

The central bank last week cut its assessment of consumer spending in its monthly economic report and reduced the growth forecast for this fiscal year to 1.2 percent from 1.5 percent.

``The risk of an economic slowdown has increased since April, while the central bank realizes that price gains are mainly driven by rising oil and raw materials,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The Bank of Japan will keep the policy status quo for a considerably long time.''

The bank will hold the benchmark interest rate at 0.5 percent for the rest of the year at least, according to 31 of 33 economists surveyed by Bloomberg News this month. Two analysts predict a rate increase.

Core inflation will probably accelerate further in July as utilities and processed food makers raise retail prices.

Tokyo Electric

Tokyo Electric Power Co. and nine other power companies increased charges on July 1, as did four gas providers including Tokyo Gas Co. Tokyo Electric also plans to adopt a new pricing system in September to better reflect higher fuel costs, a sign that electricity charges will climb further later this year.

Companies that are raising prices to absorb higher costs are also seeing sales drop.

All Nippon Airways Co., Japan's second-largest carrier, last week said surcharges it imposed to compensate for record jet fuel prices will cut annual sales by about 10 billion yen ($94 million).

Tokyo's core prices, a harbinger of the nationwide index, probably rose 1.6 percent this month from a year earlier, following a 1.3 percent gain in June, according to economists.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net