Japan's Wholesale Inflation Eases as Oil Declines

By Mayumi Otsuma

Nov. 13 (Bloomberg) -- Japan's wholesale inflation rate slowed for a second month, adding to evidence that cost pressures are easing in the world's second-largest economy.

Producer prices, the costs companies pay for energy and raw materials, climbed 4.8 percent from a year earlier after a 6.8 percent increase in September, the Bank of Japan said in Tokyo today. The median estimate of 32 economists surveyed by Bloomberg News was for 5.5 percent.

Falling crude oil prices and the yen's advance against the dollar are making fuel and raw materials imports cheaper, providing some relief to Japanese companies that are threatened by weakening demand. The central bank last month cut the benchmark rate to 0.3 percent to protect the economy from fallout from the global financial crisis.

``The effect of falling crude oil prices will become more evident, subduing gains in producer prices,'' said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo. ``Japan's economy will probably head toward a state of zero inflation.''

Revised data show prices peaked in August, when they rose 7.4 percent. Unadjusted figures show inflation fell 1.6 percent in October from September, the biggest drop since the bank started compiling the figures in January 1960.

Recent reports show inflation is easing. Consumer prices cooled in September from a decade high and corporate service costs rose at the slowest pace in almost two years.

Inflation Risk

Central bank policy makers said on Oct. 31 that the risk of inflation ``seems to have decreased'' while concern about a deeper economic slowdown has intensified amid the market turmoil.

Japan's wholesale inflation will probably decline 0.8 percent in the year that starts April 2009 after advancing 4.6 percent this fiscal year, the bank said last month. In July, the policy board projected a 4.8 percent increase in the current year and 1.8 percent the following period.

Still, the board members said the bank should continue to watch the risk of potential inflation and closely watch consumers' inflationary expectations as well as how companies are setting prices.

``If the bank claims it has a forward-looking policy, it's hard to argue that upward risks for prices will stay,'' said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Chase & Co. in Tokyo. ``The central bank may stick to its mantra for inflation risk because it doesn't want to cut interest rates further.''

Crude oil has lost more than half of its value since exceeding $147 a barrel for the first time on July 11. Soybeans, corn and wheat have slumped after climbing to records this year.

The Bank of Japan's overseas commodity index, which shows changes in costs including oil, steel, copper and wheat, slid 30 percent in October, the first drop since September 1991.

The yen has strengthened 12 percent against the dollar in the past three months, making imports cheaper.

``On top of commodity price drops, the yen's exchange rate will keep exerting downward pressure on prices,'' said Morita at Barclays Capital. ``We need to keep our eyes on both factors'' to predict the direction for producer prices.

Gross domestic product probably expanded at an annual 0.1 percent pace in the three months ended September 30 after contracting 3 percent in the second quarter, according to the median estimate of 26 economists surveyed by Bloomberg News. The government will publish the GDP figures on Nov. 17.

Wholesale inflation will probably slow to around 4 percent in March and may start to drop by the third quarter of 2009, according to Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.

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