By Mayumi Otsuma
April 25 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in a decade in March as companies foisted higher costs of energy and grains onto households to protect profits.
Core consumer prices, which exclude fruit, fish and vegetables, climbed 1.2 percent from a year earlier after gaining 1 percent in February, the statistics bureau said in Tokyo today. That matched the median estimate of 39 economists surveyed by Bloomberg News.
Costlier oil and commodities are squeezing companies and households, smothering growth in the world's second-largest economy just as a U.S. slowdown hits the country's export-led expansion. The Bank of Japan may discard language calling for higher interest rates in its twice-yearly outlook next week even as it raises the inflation forecast.
``Inflation spurred by rising costs will keep discouraging companies and consumers from spending,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. ``The Bank of Japan probably thinks now's not the time to push forward with a rate-hike campaign.''
The yield on Japan's 10-year bond rose 5 basis points to 1.53 percent at 9:25 a.m. in Tokyo. The yen traded at 104.36 per dollar from 104.34 before the report was released.
Food accounted for a third of the gains in core prices, and energy contributed more than half. Excluding food and energy, prices rose 0.1 percent, the first increase since August 1998.
Kagome Co. said this week it will raise prices of vegetable and fruit drinks to reflect higher costs of ingredients and packaging materials.
While the prospect of slower growth may prompt the central bank to keep borrowing costs on hold this year, faster inflation makes a cut less likely. Expectations that the bank will lower the benchmark rate from 0.5 percent evaporated in the past month.
Investors see a 56 percent chance of a rate increase by December compared with 38 percent before today's report, according to JPMorgan Chase & Co. calculations. As recently as March 20, traders priced in a 71 percent likelihood of a cut. Goldman Sachs Group Inc. this week dropped its prediction for a reduction this year.
The central bank will probably lower its growth forecast from 2.1 percent for the year ending March 2009 and raise its projection for core-price increases from 0.4 percent, according to economists. The bank will publish the outlook on April 30.
``The Bank of Japan will raise its inflation forecast on expectations food and energy prices will keep rising,'' said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. ``The bank may address the risk that price increases will fuel consumers' inflationary expectations.''
Japan's wholesale prices rose at the fastest pace in 27 years in March. Crude oil has doubled in three years, and reached a record $119.90 a barrel this week.
Economic and Fiscal Policy Minister Hiroko Ota said Japan's inflation ``isn't at all a good thing'' because it's being driven by higher energy prices rather than demand. The country is still struggling to stamp out deflation, she said today.
Core consumer prices resumed rising in October after declining for eight months. They either hovered near zero or fell since March 1998, when an increase in the country's sales tax pushed gains to 1.8 percent.
Stagnant wages are containing inflation and have made consumers reluctant to accept higher prices. Wages fell at the fastest pace in three years in 2007.
BOJ `Reasonably Relaxed'
The Bank of Japan ``seems reasonably relaxed about the inflation numbers because there's no sign it's feeding into wages demand and creating an inflationary spiral,'' said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. The bank ``isn't going to be doing anything for the remainder of this year.''
Core prices rose 0.3 percent in the year ended March 31, the government said, the fastest pace in a decade.
Tokyo's core prices, a harbinger of the nationwide index, rose 0.7 percent in April from a year earlier, following a 0.6 percent gain in March. Inflation in the capital accelerated even after the expiry of a gasoline tax made the fuel cheaper.
The government will reinstall the tax on May 1, the Yomiuri newspaper reported today, citing a government official it didn't identify by name.