Japan’s Wholesale Inflation Slows for Third Month as Oil Drops

By Mayumi Otsuma

Dec. 10 (Bloomberg) -- Japan’s wholesale inflation slowed for a third month, adding to evidence that price pressure in the world’s second-largest economy is fading.

Producer prices, the costs companies pay for energy and raw materials, climbed 2.8 percent in November from a year earlier after a revised 5 percent increase in October, the Bank of Japan said in Tokyo today. The median estimate of 27 economists surveyed by Bloomberg News was for 2.8 percent.

A decline in fuel and materials prices offers little respite to companies, whose earnings are being eroded by a deepening global slowdown. Sales and profits at Japanese businesses will probably decline this fiscal year and the next, the first back-to-back declines since 1993, Daiwa Institute of Research said last week.

“Other things being equal, the improvement in the terms of trade due to lower energy and materials prices will be a plus for corporate earnings,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. “However, volume effects associated with lower demand will likely exceed the positive price effect for the time being.”

Producer prices fell 1.9 percent in November from October, when they declined 1.4 percent, the central bank said today.

Crude oil has lost 70 percent of its value since peaking at $147.27 in July. 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 41.2 percent in November, the biggest drop since the central bank started compiling the data in 1990.

Deflation Return

Japan’s economy shrank in the third quarter at a pace of faster than initially predicted, a government report showed yesterday. The downturn is prompting some economists to say deflation may return.

Core consumer prices, which exclude fresh food and are the central bank’s preferred measure of inflation, have decelerated for two months. Corporate service prices, the costs businesses pay for services such as transport and rent, tumbled for the first time in two years.

Central bank Governor Masaaki Shirakawa said last week Japan’s “price situation has changed drastically” and consumer inflation “may turn negative briefly” in the year starting April 1. Policy makers need to see whether the drop in commodity prices spreads to other goods and services and prompts consumers to expect further falls, he said last month.

“Until recently, the Bank of Japan was worried about a surge of inflation, but now their headache is shifting to the risk of deflation,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. He added he expects the economy to continue to contract through the third quarter of next year.

Global Slump

Toyota Motor Corp., the world’s second-largest automaker, last month said its profits will fall at the fastest pace in at least 18 years in the year ending March 31 as a global slump cripples auto demand and gains in the yen erode the value of overseas sales. Honda Motor Co. and Nissan Motor Co. are also predicting larger-than-expected drops in earnings.

“Japan’s producer prices will probably start to fall as early as the first quarter of 2009, given the accelerating pace of commodity price declines,” said Hiroshi Watanabe, an economist at Daiwa Research in Tokyo. “Companies are losing reason to ask for higher prices even though they have yet to cover all cost increases caused by oil price gains.”

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