Japan Inflation Exceeds 2% for First Time in Decade

By Mayumi Otsuma

Aug. 29 (Bloomberg) -- Japan's inflation rate exceeded 2 percent for the first time in a decade as prices of food and gasoline surged, prompting consumers to spend less.

Core prices, which exclude fresh food, climbed 2.4 percent in July from a year earlier after rising 1.9 percent in June, the statistics bureau said today in Tokyo. Household spending fell 0.5 percent from a year earlier, a fifth monthly decline.

The government will release an economic stimulus package later today that will include support for households coping with noodle, bread and milk prices that are rising faster than wages. Job prospects worsened last month, a separate report showed, another blow for consumers who are already the most pessimistic they've been in at least 26 years.

``Rising raw-material costs are forcing companies to increase the prices of their products, but wages aren't rising,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The economic downturn is likely to continue'' until the middle of 2009, Muto said.

The ratio of jobs available to each applicant dropped for a sixth month to 0.89, the lowest since October 2004, the Labor Ministry said today. The unemployment rate fell to 4 percent from 4.1 percent.

The yen rose to 109.07 per dollar as of 11:07 a.m. in Tokyo from 109.53 before the figures were released, on speculation reports will show U.S. consumer spending slumped. The yield on Japan's 10-year bond fell half a basis point to 1.415 percent.

Bank of Japan

July's increase in core prices was the steepest since October 2007, when they were boosted by a sales tax increase. Excluding the tax, prices last climbed that much 16 years ago.

The gains are unlikely to prompt the Bank of Japan to raise interest rates anytime soon because the economy is on the brink of a recession and Governor Masaaki Shirakawa expects inflation will moderate as commodity costs ease. There are few signs inflation is spreading from food and fuel products because wage growth is weak, Shirakawa, 58, said this week.

``The Bank of Japan places more focus on economic growth than inflation now,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo. ``The central bank will probably hold off raising rates until the third quarter of next year.''

Economic and Fiscal Policy Minister Kaoru Yosano said wages need to increase for consumption to pick up. Prices of goods purchased at least 15 times a year climbed 3.6 percent in July, today's report showed. Wages rose 0.4 percent in June.

Energy, Food

Energy-related products accounted for more than half of the increase in core prices, and food goods contributed one-third. Excluding food and energy, prices rose for only the third time since 1998, climbing 0.2 percent from a year earlier after increasing 0.1 percent in June.

McDonald's Holdings Co. Japan raised the price of a Big Mac this month. Nichirei Corp., a Tokyo-based food maker, plans to increase prices of some frozen foods next month.

``The thrust from food prices will keep core inflation above 2 percent through November even after energy costs peak,'' said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. ``We won't see prices really ease until the New Year.''

Bank of Japan policy makers have said they consider core prices to be stable between zero and 2 percent and they focus on inflation trends over the long term. ``Unless core prices breach the range for a year at least, the Bank of Japan will regard any deviations just as temporary,'' Daiwa SMBC's Iwashita said.

`Sluggish' Economy

The central bank has kept the key overnight lending rate at 0.5 percent since doubling it in February 2007. It shelved a policy of gradual rate increases in April, and last week said the economy was ``sluggish'' for the first time in a decade after a report showed gross domestic product fell an annualized 2.4 percent in the second quarter.

Industrial production unexpectedly rebounded in July, a separate report showed today, as Asian demand helped exporters withstand a slump in U.S. shipments. Output rose 0.9 percent from June, when it fell 2.2 percent, the trade ministry said.

The ``month-on-month numbers tend to be volatile and don't reflect the overall trend, which seems to be weakening,'' Matt Robinson, an economist at Moody's Economy.com in Sydney, told Bloomberg Television.

The government maintained its assessment that production is weakening. Companies forecast output will decline 2.9 percent in August before rising 3.4 percent in September, the survey showed.

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