Japan's Inflation Rate Doubles to 0.8% as Oil Surges (Update1)

By Mayumi Otsuma


Jan. 25 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in more than nine years in December, as oil and commodity costs surged.

Core consumer prices, which exclude fresh food, climbed 0.8 percent from a year earlier, double November's increase, the statistics bureau said today in Tokyo. The median estimate of 44 economists surveyed by Bloomberg News was for a 0.6 percent gain.

Inflation driven by rising costs is hurting consumers, whose wages are falling, just as the country's export-led economy is losing steam. Bank of Japan Governor Toshihiko Fukui said price gains will accelerate in coming months because crude oil costs will remain high.

``The global economy is slowing while prices of food and energy keep advancing,'' said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo, who expects the central bank to keep interest rates on hold this year. ``That's the worst combination for the Japanese economy, which depends on exports and has stagnating domestic demand.''

The yen traded at 107.17 per dollar at 8:41 a.m. in Tokyo from 107.12 before the report was released.

The central bank this week kept the benchmark overnight lending rate at 0.5 percent, the lowest among major economies. Investors predict it may need to lower the rate to prevent the economy from slipping into recession. There is a 67 percent chance of a cut by July, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

Consumer Confidence

Consumer confidence fell to a four-year low in December and wages only rose in two of the first 11 months of last year.

Core consumer prices were unchanged in 2007, today's report showed. Prices started rising in October after falling for eight months. Even before then, 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.

``Japan's consumer prices may rise as much as 0.8 percent toward April, but most of those gains will be from oil,'' said Masaaki Kanno, a former central bank official and now chief economist at JPMorgan Securities in Tokyo. ``Unless oil prices gain further momentum, core prices will resume falling toward the end of the year.''

Tokyo's core prices, a harbinger of the nationwide index, rose 0.4 percent in January from a year earlier, following a 0.3 percent gain in December.

Excluding energy as well as food, nationwide consumer prices fell 0.1 percent in December. By that measure, they've failed to rise for nine years.

Oil, Commodities

Crude oil rose to a record $100 a barrel this month. A UBS Bloomberg index of 26 commodities that tracks the prices of oil, industrial metals, agriculture and livestock climbed to a record on Jan. 14 after surging 22 percent last year.

Central bank policy makers said this week that growth in the year ending March will probably be slower than the 1.8 percent they forecast three months ago. Board members said consumer prices will probably rise faster than they had anticipated in October, when they said inflation would be flat this year.

Japan's top breweries -- Kirin Holdings Co., Asahi Breweries Ltd. and Sapporo Holdings Ltd. -- plan to raise beer prices in the next three months to cover higher malt costs. Nisshin Foods Inc., Japan's biggest macaroni maker, will increase pasta prices as wheat costs soar.

The biggest reason for an economic slowdown is that companies, particularly small ones, remain unable to pass on costs out of concern that sales may decrease, said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

``Some companies, worrying that worsening performance may force them to go bankrupt, started to raise prices,'' Kono said. ``But without wage increases, higher prices will only hurt households' purchasing power and choke off spending.''