By Mayumi Otsuma
Sept. 28 (Bloomberg) -- Japan's consumer prices fell for a seventh month in August, as retailers absorbed higher costs to attract customers.
Core consumer prices, which exclude fresh food, dropped 0.1 percent from a year earlier, the same pace as the preceding four months, the statistics bureau said in Tokyo today, matching the median estimate of 45 economists surveyed by Bloomberg News.
Daiei Inc. and Aeon Co., among Japan's largest retailers, announced discounts to boost sales even as manufacturers raised prices of products ranging from mayonnaise to toilet paper. Core prices may resume gains as early as next month, mainly driven by higher fuel costs, said economist Hiroaki Muto.
``Unless large retailers start raising prices, Japan's core inflation won't take hold,'' said Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. ``The closer companies are to consumers, the harder it is for them to increase prices.''
Daiei said this month that it would cut prices of 100 house-brand food items. Aeon said in August it will freeze prices of a similar number of goods such as coffee and tissue paper until the end of the year.
Tokyo's core prices, an indicator of the nationwide index, fell 0.1 percent in September, the statistics bureau report showed. Economists expected prices in the capital to be unchanged for a second month.
Separate reports showed household spending climbed 1.6 percent in August and the unemployment rate increased to 3.8 percent from 3.6 percent.
The yen traded at 115.53 per dollar at 8:42 a.m. in Tokyo from 115.49 before the reports were published.
Bank of Japan Governor Toshihiko Fukui said on Sept. 19 that prices will gradually resume rising even after the economy contracted in the second quarter and a U.S. mortgage rout heightened concern that global growth will slow. The bank should increase Japan's ``very low'' interest rates, he said.
Miyako Suda, a central bank board member, said yesterday that the economy may overheat should the bank fail to increase borrowing costs fast enough. Policy makers last week kept the benchmark overnight lending rate at 0.5 percent, the lowest among major economies.
Japan has struggled to beat deflation that emerged after an asset-price bubble burst in the early 1990s and compelled the central bank to cut interest rates to near zero percent. The bank raised the key rate for the first time in almost six years in July 2006 and doubled it to 0.5 percent in February.
Investors yesterday saw a 9 percent chance policy makers will raise the benchmark rate at their next meeting on Oct. 10- 11, according to Credit Suisse Group calculations based on interest payments.
Signs are emerging that consumer prices will soon rise for the first time since December.
House Foods Corp. said this month that it will raise prices of 116 items such as curry and instant noodles for the first time in 17 years to help pay for higher costs of edible oil, wheat and spices.
Sanyo Foods Co., Japan's third-largest instant-noodle maker, also said it will raise prices from January. Nippon Meat Packers Inc. and Itoham Foods Inc. will increase prices of meat products this month and in October.
Prices of services are also gaining. Transportation authorities this week allowed taxi fares to climb in Wakayama, western Japan, the Nikkei newspaper reported.
Higher charges have already been approved in Nagoya, Akita, Nagasaki and Okinawa and Tokyo-based taxi operators are also asking passengers to pay more.
``As a housewife myself, I've noticed many news reports about price increases in Japan, such as mayonnaise, taxi fares, wine, instant noodles and photocopy paper,'' Suda said yesterday. ``There's a risk of inflation soaring unexpectedly in the near future.''
Last Updated: September 27, 2007 19:43 EDT