Japan's Inflation Rate Rises to Highest in Decade (Update1)

By Mayumi Otsuma


March 28 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in a decade in February as companies passed on higher costs of oil and food to households.

Core consumer prices, which exclude fruit, fish and vegetables, climbed 1 percent from a year earlier, compared with a 0.8 percent gain in January, the government's statistics bureau said today in Tokyo. The median estimate of economists surveyed by Bloomberg News was for a 0.9 percent increase.

Faster inflation amid slowing growth is a headache for the Bank of Japan, which may have to reverse its policy and cut interest rates to avert a recession. Bank of Japan acting Governor Masaaki Shirakawa and Deputy Governor Kiyohiko Nishimura, both of whom were appointed this month, say costlier energy and raw materials are dimming the economic outlook and the bank is ready to take ``flexible'' steps.

``Core inflation numbers will hover at high levels for a while because of oil and food and will hurt confidence'' of businesses and households, said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo. ``We can't completely rule out the possibility of a rate cut'' later this year.

Traders see a 46 percent chance the central bank will lower the key overnight lending rate from 0.5 percent by December, JPMorgan Chase & Co. calculations show.

Rising Unemployment

Other reports today showed the unemployment rate unexpectedly rose to 3.9 percent in February and the ratio of jobs to applicants worsened, sliding to a two-year low of 0.97. Household spending was unchanged, the statistics bureau said. Economists estimated a 2.4 percent increase.

The yen traded at 99.53 per dollar at 8:52 a.m. in Tokyo, from 99.44 before the reports were published.

The bank's Tankan business survey on April 1 will probably show confidence of large manufacturers falling to the lowest level in four years as higher costs and a stronger yen erode profits, according to economists surveyed by Bloomberg News.

``No one can deny that the economy has been underperforming'' from the central bank's outlook, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo. ``Recent developments in the economy are pressuring the bank's new leaders to clearly downgrade their projections.''

Miyako Suda, a central bank board member, said yesterday growth in the year starting April 1 will probably fall short of the bank's 2.1 percent projection made in its twice-annual outlook last October. The central bank will release its next projections on April 30.

Consumers Pessimistic

Consumer confidence slid to a five-year low in February as prices of daily necessities rose while pay stagnated. Wages slid 0.7 percent in 2007, the steepest decline in three years.

Japanese food makers have raised prices of noodles, beer and bread in the past year because of higher costs of grains. Crude oil rose to a record $111.80 a barrel on March 17 and wheat soared to the highest ever this month.

Morinaga Milk Industry Co., Japan's second-largest maker of dairy products, this month said it will raise butter prices for the first time in 23 years to reflect costlier milk. Snow Brand Milk Products Co. and Calpis Co. said they'll follow suit.

``The dairy manufacturers had no other choice but to turn on price hikes to avoid making losses,'' said Tomonobu Tsunoyama, an analyst at Tokai Tokyo Securities. ``With little prospect that wages will rise any time soon, there's a concern that the price hikes may end up hurting sales.''

Tokyo's core prices, a harbinger of the nationwide index, rose 0.6 percent in March from a year earlier, following a 0.4 percent gain in February. Tokyo prices rose 0.l percent in the year ending March 31, the first increase in a decade.

Inflation Outlook

Core prices started 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.

Some economists say inflation may wane later this year as oil and commodities costs ease and consumer demand fails to pick up amid sluggish wage growth.

``With growth slowing and demand weakening in coming months, oil prices will probably fall and companies will continue to struggle to raise prices beyond oil and food,'' said Azusa Kato, an economist at BNP Paribas in Tokyo. ``Core-price inflation may slump to almost zero in the first quarter of 2009.''

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

Parliament's decision on whether to extend a higher tax on gasoline may also affect consumer prices. The tax is set to expire on March 31 after the opposition Democratic Party of Japan refused to discuss a bill to extend it.

The tax may be renewed in a month or disappear indefinitely. An permanent end to the levy would lower core prices by 0.4 percentage point and warrant a change in the inflation outlook, said Chiwoong Lee, an associate economist at Goldman Sachs Group Inc. in Tokyo.