Japan's Wholesale Inflation Rises to a 27-Year High

By Mayumi Otsuma

July 10 (Bloomberg) -- Japan's wholesale inflation rate rose to a 27-year high in June as companies raised prices to counter record oil and commodity costs.

Producer prices climbed 5.6 percent from a year earlier, after a revised 4.8 percent gain in May, the Bank of Japan said in Tokyo today. The median estimate of 36 economists surveyed by Bloomberg News was for 5.3 percent.

Oil, wheat and soybean costs have almost doubled in the past year, forcing companies to charge more and fanning the fastest consumer-price inflation in a decade. Costs are gaining faster than firms can raise prices, prompting businesses to predict the first profit decline in seven years, a report last week showed.

``Producer prices are rising so rapidly that companies can't absorb them,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``Higher prices are squeezing profits to the point where companies have no choice but to pass costs onto consumers.''

The yen traded at 106.91 per dollar at 9:55 a.m. in Tokyo from 106.84 before the report was published.

Crude oil rose to a record $145.85 a barrel on July 3 and retail gasoline prices have risen more than 18 percent this year to 181.5 a liter ($6.40 a gallon). The Bank of Japan's overseas commodity index soared 70.9 percent in June from a year earlier.

`So Rapid'

Japan's current-account surplus narrowed for a third month in May as oil prices pushed up the import bill, a separate report released today showed.

``The pace of raw-material price increases is so rapid that companies' attempts to pass costs are failing to catch up with cost surges,'' Masahiro Samejima, who heads the central bank's Osaka branch, told reporters on July 7.

Nisshin Oillio Group Ltd., J-Oil Mills Inc. and Showa Sangyo Co., the country's three largest edible oil makers, raised their prices this month. Ajinomoto Co. increased mayonnaise prices and QP Corp. plans to follow suit in August. Kagome Co., a maker of ketchup and canned food, increased tomato juice prices by 10 percent.

Consumers are starting to be squeezed as companies raise prices. Higher costs are forcing consumers to pare spending, which probably caused the economy to contract last quarter, according to economists surveyed by Bloomberg News last month.

The gain in producer prices matched the 5.6 percent increase recorded in February 1981. Prices rose 0.8 percent from May, slowing from a revised 1.2 percent increase.

Consumer Prices

Higher producer costs are feeding into consumer prices, and inflation excluding fresh food will probably exceed 2 percent as soon as next month, according to Azusa Kato, an economist at BNP Paribas in Tokyo. The Bank of Japan regards prices as stable when they are between zero and 2 percent.

Kato said the price increases won't prompt the central bank to raise its benchmark interest rate from 0.5 percent because higher prices are crimping growth in the world's second-largest economy.

``Japan's inflation rate is relatively calm compared with other countries', and there are no signs that costlier oil will trigger wage increases,'' Kato said. Rising prices ``won't lead to interest rate hike discussions at the central bank.''

Core consumer prices rose 1.5 percent in May from a year earlier, less than half the pace of gains in the euro zone and lower than the 2.3 percent inflation in the U.S. Wages rose 0.2 percent in the month, the slowest increase this year.

Price increases are spreading beyond energy and food to industries such as automakers, which have so far avoided charging more through cost cutting and improving productivity. Hino Motors Ltd., Japan's largest maker of heavy trucks, and Nissan Diesel Motor Co. this month raised prices of vehicles for the first time in almost 17 years to absorb costs.

Costlier steel, rubber and aluminum costs are ``practically impossible to absorb,'' Nissan Motor Co. Chief Executive Officer Carlos Ghosn told shareholders last month.

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