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, squeezing corporate profits, increasing bankruptcies and threatening the economy's longest postwar expansion.

Producer prices, the costs companies pay for energy and raw materials, 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.

More businesses failed because of rising fuel and raw- material costs in the first half of this year than for all of 2007, according to Teikoku Databank Ltd. Tokyo-based Galaxy Airlines Co. said last week that it will stop air cargo services, and Nippon Paper Group Inc. plans to increase prices for the second time this year.

``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 110.15 per dollar as of 11:10 a.m. in Tokyo from 110.14 before the report was published. Japan's currency has fallen 2 percent this month. Government bonds dropped for the first time in five days, causing the yield on 10-year debt to rise 1 basis point to 1.46 percent.

Interest Rates

Faster inflation is unlikely to prompt the Bank of Japan to raise interest rates as the economy teeters on the verge of its first recession since 2001. Governor Masaaki Shirakawa and his colleagues will keep the benchmark overnight lending rate at 0.5 percent for the rest of the year at least, according to 31 of 33 economists surveyed by Bloomberg last month.

The central bank last month raised its inflation forecast and cut its growth estimate, saying higher costs are squeezing companies and households. The world's second-largest economy probably shrank at an annual 2.3 percent pace last quarter, the first contraction in a year, economists estimate a report will show tomorrow.

Nippon Paper, Japan's second-largest paper maker, said last month it will raise prices by 10 percent in September. 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.

Iranian Revolution

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 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 most 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 last month. Transport, food and metal companies led the failures.

Galaxy Airlines, an air cargo operator whose shareholders include SG Holdings Co., the holding company of Sagawa Express Co., last week said it will stop operations in October because of rising fuel and maintenance costs. The company was founded three years ago.

``Small and medium-size companies are really suffering under this cost environment,'' Stefan Worrall, vice president of Japan equity sales at Credit Suisse Group in Tokyo, said on Bloomberg Television.

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