Japan's Inflation Exceeds 2% for Second Month on Oil

By Mayumi Otsuma

Sept. 26 (Bloomberg) -- Japan's consumer-price inflation exceeded 2 percent for a second month as companies passed on costs of food and other daily necessities.

Core prices, which exclude fresh food, climbed 2.4 percent in August from a year earlier, the same pace as July, the statistics bureau said today in Tokyo. The median estimate of 33 economists surveyed by Bloomberg News was for a 2.4 percent increase.

The fastest inflation in a decade won't spur an interest- rate increase by the Bank of Japan because prices gains are likely to moderate as oil costs drop. Policy makers will probably keep the key rate at 0.5 percent, the lowest in the industrialized world, as it monitors the effect of the global financial crisis on Japan's shrinking economy.

``Inflation will peak soon,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group in Tokyo. ``That will allow the Bank of Japan to remain on hold and keep an eye on the economy for a while.''

The yen traded at 105.96 per dollar at 11:21 a.m. in Tokyo from 106.40 before the report was published. Yields on 10-year government debt fell 1 basis point to 1.465 percent.

The core inflation rate has surpassed wage growth for four months, stripping consumers of their spending power and pushing their sentiment to a 26-year low. The economy contracted last quarter as exports and personal spending dropped.

Inflation Alarm

``We are not ringing the secondary-inflation alarm, as wages are weak and penetration of price hikes is likely to be mild,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

Crude oil has fallen by more than a fifth since rising to a record in July. Soybeans, corn and wheat have slumped after climbing to records this year.

Finance Minister Shoichi Nakagawa said today that higher prices are hurting consumers and companies and that the government is taking measures to ease the burden. The government said last month it would cut taxes for some low-income earners.

Some economists say consumer inflation will hover around 2 percent even as commodity costs tumble because companies have yet to make up for accumulated losses incurred by fuel and material cost increases and will try to pass on costs to clients.

``Though the economy will likely be stuck in a recession for a while, prices will stay at high levels,'' said Mamoru Yamazaki, chief Japan economist at RBS Securities in Tokyo. ``The central bank will neither raise nor cut rates for the time being.''

Potato Chips

Calbee Foods Co., a Tokyo-based snack food maker, said this month it will raise potato chip prices by about 8 percent in November to offset costlier edible oil. The company last year tried to absorb costs by reducing the amount of chips per package.

The central bank expects core consumer prices to moderate gradually as oil prices decline, Governor Masaaki Shirakawa said last week. Even so, the bank should carefully watch whether consumers' inflationary expectations and companies' price- setting behaviors will change, he said.

Bank of Japan policy makers have said they consider core prices to be stable if they stay between zero and 2 percent over the mid- and long-term period. Prices by that measure will probably average 1.6 percent in 2008 and 1.4 percent in 2009, according to Tetsufumi Yamakawa, a former Bank of Japan official and now chief Japan economist at Goldman Sachs Group Inc.

Shelved Policy

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.

Of 29 economists who gave predictions through June in a Bloomberg survey, 24 said the central bank will keep rates unchanged by then. Four estimated higher rates and one forecast a cut.

Excluding food and energy, prices were unchanged in August from a year earlier after increasing 0.2 percent in July. Core prices in Tokyo advanced 1.7 percent in September from a year earlier, faster than the 1.5 percent increase of August, today's report showed.

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