Japan Wholesale Prices Rise at Fastest Pace in 27 Years on Oil

By Mayumi Otsuma

Sept. 10 (Bloomberg) -- Japan's wholesale inflation rate stayed close to a 27-year high in August, squeezing corporate profits and hurting an economy that may already be in a recession.

Producer prices, the costs companies pay for energy and raw materials, climbed 7.2 percent from a year earlier from a revised 7.3 percent increase in July, the Bank of Japan said in Tokyo today. The median estimate of 33 economists surveyed by Bloomberg News was for 7.2 percent.

Wholesale inflation in Japan may slow to reflect lower crude oil prices, which have tumbled by more than a fifth since reaching a record in July. Bank of Japan Governor Masaaki Shirakawa last week said there are few signs that higher commodity prices are spreading through the economy because wages aren't rising as fast as prices.

``Japan's producer price increases are close to their peak, though they will remain at high levels for a while,'' said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. ``With wage growth stagnating and economic growth slowing, there is little risk that inflation will become a rooted problem.''

Producer prices fell 0.1 percent in August from July, when they rose 2.2 percent, the central bank said.

Crude oil has fallen 28 percent since exceeding $147 a barrel for the first time on July 11, prompting gasoline retailers to cut prices at pump for a fourth week while soybeans, corn and wheat have slumped after climbing to records this year.

Profit Margins

Higher costs have eaten into profit margins, leaving companies with less to spend on wages and equipment. Weaker exports and capital spending caused the economy to contract last quarter, prompting some economists to predict the world's second-largest economy is already in a recession.

Nippon Oil Corp. and Japan Energy Corp. cut wholesale gasoline prices this month to reflect the recent decline in oil. Prices at the pump fell to 176.2 yen a liter ($6.12 a gallon) in the week ended Sept. 1, 4.8 percent lower than the record marked in August.

``Accelerating cost gains will gradually fade, and the focus is shifting to when and how much price gains will moderate,'' said Kyohei Morita, chief economist at Barclays Capital in Tokyo. Prices may cool should oil prices continue to drop and the yen extend its gains against the dollar, he said.

A 5 yen per liter drop in gasoline, kerosene and other oil products in a month would lower wholesale prices by 0.31 percentage point and a 10 percent advance in the yen against the dollar would push prices down by 0.5 percentage point, Morita estimates. The yen has gained 1.8 percent in the past month against the dollar.

The Bank of Japan's overseas commodity index, which shows changes in commodity costs including oil, steel, copper and wheat, rose 42 percent in August from a year before, slower than a 52 percent increase in July.

Foist Costs

Companies continue to foist costs onto customers to protect profits even as commodity prices decline. Durable goods makers, which have managed to absorb costs by increasing productivity so far, are starting to charge more.

Toyota Motor Corp. raised prices of hybrid Prius cars and some commercial vehicles on Sept. 1, its first increase in the domestic market in 16 years. Mitsubishi Electric Co. last month announced a plan to raise prices of air-conditioners and refrigerators.

Profits of Japanese manufacturers contracted 11.7 percent in the second quarter while their sales rose 1.4 percent, a Finance Ministry survey showed last week.

``Sales are going up, but costs are going up faster because of commodity prices, and profits are going down at an accelerating pace,'' said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo.

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