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

Japan's Inflation Rate Doubles to 0.8% as Oil Surges (Update2)

By Mayumi Otsuma

Jan. 25 (Bloomberg) -- Japan's inflation rate doubled in December to the fastest in more than nine years, as companies passed rising oil and commodity costs to consumers.

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

Dairy farmers on the northern island of Hokkaido yesterday raised the price of milk by 3 percent because of higher costs of feed for cows. Higher energy and materials expenses hurt growth by eroding corporate profits and spending by consumers whose wages are falling.

``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 107.23 per dollar at 10:38 a.m. in Tokyo from 107.12 before the report was released, and is heading for a weekly decline against the world's 16 most-active currencies after global stocks rebounded. The yield on Japan's 10-year bond rose 6 basis points to 1.445 percent.

Reduced Bets

Investors reduced bets that the central bank will lower the key lending rate from 0.5 percent later this year. There is a 45 percent chance of a cut by July, down from 67 percent before the inflation report, according to calculations by JPMorgan Chase & Co. using overnight interest-rate swaps.

Bank of Japan policy makers said it's likely growth will slow and inflation will quicken in the short term, according to minutes of their December policy meeting released in Tokyo today. Central bank Governor Toshihiko Fukui said this combination makes it ``difficult'' to decide interest-rate policy.

``Rising daily-goods prices are negative for consumer spending when wage growth has stalled,'' Economic and Fiscal Policy Minister Hiroko Ota told reporters today. ``We can't say Japan has made a major step'' toward the end of deflation.

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.

`Soft Stagflation'

``Japan is experiencing a sort of soft stagflation this quarter,'' said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo, who estimates 1 percent inflation in the period. ``Price increases combined with sluggish demand will cut disposable incomes and weaken consumption further.''

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.

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 fiscal year.

Top Breweries

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.''