By Mayumi Otsuma
Aug. 12 (Bloomberg) -- Japan’s producer prices fell at a record pace in July as oil traded lower than last year and companies required fewer materials amid a recession.
The costs companies pay for energy and unfinished goods declined 8.5 percent from a year earlier after sliding a revised 6.7 percent in June, the Bank of Japan said today in Tokyo. The median estimate of 24 economists surveyed by Bloomberg News was for an 8.7 percent drop.
The report highlights concern that deflation will become entrenched and hamper a rebound from the nation’s worst postwar recession. Bank of Japan Governor Masaaki Shirakawa said yesterday that his policy board is closely watching the decline in prices, while adding that there’s little risk of a deflationary spiral now.
“It will take a long time before producer prices return to positive territory,” said Taisuke Nakamoto, an economist at Dai-Ichi Life Research Institute in Tokyo. Weak demand “will continue to exercise downward pressure on prices.”
The year-on-year decline in costs was the biggest since the central bank started compiling the report in 1960. From June, prices rose 0.4 percent, today’s report showed.
Signs of deflation are spreading. Consumer prices excluding fresh food, the central bank’s preferred gauge of inflation, fell a record 1.7 percent in June from a year earlier. The central bank may forecast later this year that consumer prices will keep falling in the year ending March 2012 even as the economy recovers.
Delay Purchases
Expectations for lower prices ahead may prompt companies and consumers to delay purchases, eroding profits and forcing firms to cut wages. That would threaten an economy that analysts say grew at an annual 3.9 percent pace last quarter, the first expansion in a year.
A rebound in growth “will do little to counter deflationary pressure,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “It’s difficult to anticipate a change in the price environment anytime soon.”
Most of the drop in producer prices has been in reaction to record oil costs in 2008, and declines may moderate in coming months because crude plunged late last year, falling as low as $32.40 a barrel in December from $147.27 in July.
The central bank’s overseas commodity index, which shows changes in costs including oil, steel, copper and wheat, slid 44.6 percent in July from a year earlier.
Producer prices will probably decline 5.9 percent in the year to March 2010 and 2.1 percent in the following 12 months, Bank of Japan board members forecast last month.
To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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