Japan's Wholesale Inflation Rate Reaches 27-Year High

By Mayumi Otsuma

Aug. 12 (Bloomberg) -- Japan's wholesale inflation rate accelerated to a 27-year high in July as companies raised prices to offset oil and commodity costs.

Producer prices climbed 7.1 percent from a year earlier, after a revised 5.7 percent increase in June, the Bank of Japan said in Tokyo today. The median estimate of 31 economists surveyed by Bloomberg News was for 5.7 percent.

The central bank last month raised its inflation forecast and cut its economic growth estimate, saying higher costs are squeezing companies and households. Corporate bankruptcies caused by rising raw-material costs in the first half of 2008 already outnumbered those for all of last year, according to Teikoku Databank Ltd.

``Even though oil prices have been coming down in recent weeks, companies will keep trying to raise prices because they've made up for only a fraction of the cost increases they've suffered,'' said Azusa Kato, an economist at BNP Paribas in Tokyo.

The yen traded at 110.09 per dollar at 8:58 a.m. in Tokyo from 110.14 before the report was published.

The government is considering raising prices of wheat it sells to millers as much as 20 percent in October, the second increase this year, Kyodo News reported yesterday, citing farm ministry officials. It raised wheat prices 30 percent in April, prompting bread, pasta and noodle makers to follow suit.

Iranian Revolution

Nippon Paper Group Inc., Japan's second-largest paper maker, said last month it will raise prices by 10 percent in September, the second increase this year. Fuel and raw materials are ``rising so rapidly that it's too difficult to recover profits with cost-cutting efforts alone,'' the company said on July 30.

The increase in producer prices was the steepest since January 1981. From a month earlier, prices climbed 2 percent, the fastest pace since April 1980, when oil prices surged in the wake of the 1979 Iranian Revolution.

Higher commodity costs are also feeding into retail inflation. Consumer prices excluding fresh food, fish and vegetables climbed 1.9 percent in June from a year earlier, the fastest pace in a decade.

Some 235 companies went bust in the six months ended June because of rising costs, exceeding the 229 bankruptcies recorded for the same reason in all of 2007, Teikoku Databank reported. Transport, food and metal companies led the failures.

Oil Eases

Producer price gains will probably ease in coming months as oil falls and a global slowdown reduces demand for raw materials.

Crude oil has dropped 21 percent since reaching a record $147.27 a barrel on July 11. Retail gasoline prices climbed to a record 185.1 yen a liter ($6.39 a gallon) this month.

Wholesale inflation ``will probably stay around 5 percent through the end of this year and then gradually head in the opposite direction next year,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC Co. in Tokyo.

Even so, producer costs will keep fueling consumer prices for a while, economists said. Ajinomoto Co., the country's biggest foodmaker, last week announced plans to raise prices, and McDonald's Holdings Co. Japan said a Big Mac may soon cost Japanese consumers 30 yen more.

``We expect core prices will rise 2.2 percent in July and 2.3 percent in September,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``Even though crude oil prices are being adjusted now, the ongoing cost-push inflation won't weaken easily.''

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