Japan's Inflation Rate Matches Fastest in Nine Years (Update1)

By Mayumi Otsuma


Feb. 29 (Bloomberg) -- Japan's consumer prices rose for a fourth month in January, matching the fastest pace in more than nine years, as companies passed on higher costs of oil, wheat and soybeans.

Core consumer prices, which exclude fresh food, climbed 0.8 percent from a year earlier, the same rate as December, the statistics bureau said today in Tokyo. The median estimate of 46 economists surveyed by Bloomberg News was for a 0.9 percent gain.

The successor to Toshihiko Fukui, who steps down as Bank of Japan governor next month, will have to find a way to implement monetary policy as economic growth slows and inflation accelerates. Price pressure will mount even as the expansion cools, central bank policy maker Atsushi Mizuno said yesterday.

``The next central bank governor will have a tough task,'' said Eisuke Sakakibara, a former top currency official at the Finance Ministry and now a professor of Waseda University in Tokyo. ``It's getting more and more difficult to manage policy in Japan, which is experiencing rising prices and an economic slowdown -- the worst combination.''

Separate reports showed the unemployment rate stayed at 3.8 percent and the ratio of jobs to applicants remained at a two- year low. Household spending rose 3.6 percent from a year ago.

The yen traded at 104.91 per dollar at 8:47 a.m. in Tokyo, from 105.33 before the reports were released.

Fukui, who has been seeking rate increases since 2006, will probably finish his five-year term on March 19 by leaving the benchmark overnight lending rate at 0.5 percent, the lowest among major economies. Rising prices of daily necessities including gasoline and food dragged consumer sentiment to the lowest level in more than four years in January.

Production Cuts

Japan's prices are rising just as manufacturers cut production amid concern a deepening U.S. slump will weaken exports to emerging markets. Output slid 2 percent in January from a month earlier, twice the pace economists predicted.

Investors see a 30 percent chance of a rate cut by December, according to calculations by JPMorgan Chase & Co. based on overnight interest-rate swaps trading.

``Consumer prices will keep surging, driven by oil and food, and may hit 1 percent in a few months,'' said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities in Tokyo. ``Wages are stagnating, and there are plenty of negative factors for consumer spending.''

Tokyo's core prices, a harbinger of the nationwide index, rose 0.4 percent in February from a year earlier, the same pace as January. Gasoline has a lower weight in the index for Tokyo because residents of the capital don't drive as much.

Crude Oil

Excluding energy as well as food, Japan's consumer prices fell 0.1 percent in January. By that measure, prices have failed to rise for more than nine years.

Crude oil rose to a record $102.08 a barrel on Feb. 27. Japan's gasoline prices averaged 154 yen a liter ($5.50 a gallon) in January, close to December's record 156 yen, according to the Tokyo-based Oil Information Center.

Japan, Asia's biggest wheat importer, will increase prices of the grain sold to flour millers by 30 percent in April, the Ministry of Agriculture, Forestry and Fisheries said this month. Wheat prices rose to a record this week.

Nisshin Seifun Group Inc., the nation's biggest miller, and Yamazaki Baking Co., the largest bread maker, will raise prices of pasta, bread and pastry. Kikkoman Corp., Japan's No. 1 soy- sauce maker, is planning its first price increase in 18 years.

Under the new governor, the Bank of Japan will have to decide whether to focus on spurring growth or curbing inflation, said Hiromichi Shirakawa, a former central bank official.

``If the economy deteriorates further, price gains will eventually calm down, but if the economy maintains its strength, inflation may accelerate,'' said Shirakawa, who's now chief economist at Credit Suisse Group Inc. in Tokyo. ``The bank will need to decide which scenario to gear its policy toward.''