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.
Central bank Governor Toshihiko Fukui has said rising oil and commodity costs are complicating the task of conducting monetary policy, and today forecast growth will slow and inflation will quicken. The government is concerned that prices are being driven by surging oil, wheat and barley costs rather than consumer spending and business investment.
“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.''
Japan's five-year bonds fell the most in 19 months after the inflation report and a rebound in stocks. The yield on the note rose 9.5 basis points to 0.91 percent at 5:37 p.m. in Tokyo. The yen was 107.85 per dollar from 107.12 before the report.
Reduced Bets
Investors reduced bets that the central bank will lower the key lending rate from 0.5 percent later this year. There's a 43 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.
“The market's been underestimating the BOJ's focus on inflation,'' said Jan Lambregts, head of Asian research at Rabobank International in Hong Kong. “An actual rate cut could produce an increase in inflation expectations, which would only act to depress the consumer further.''
The Bank of Japan raised interest rates from near zero percent in July 2006, predicting that sustained growth will spur profits, feed into higher wages and consumer spending, and lead to stable price increases. Instead, inflation is being driven by energy and raw materials costs, hurting profits and eroding households' spending power.
Fukui said in parliament today that growth will cool to “the low 1 percent range'' in the year ending March. A slowing economy and faster inflation makes it “difficult'' to decide interest-rate policy, he said this month.
Negative for Consumers
“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 prices were unchanged in 2007, today's report showed. Prices started rising in October after eight months of declines. Before then, they either hovered near zero or fell since March 1998, when a sales tax increase pushed gains to 1.8 percent.
Core consumer price gains may accelerate and could even exceed 1 percent, Kazuo Momma, head of the Bank of Japan's research and statistics bureau, said today.
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.
Milk, Beer
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.
Dairy farmers in Hokkaido, northern Japan, yesterday raised the price of milk by 3 percent because of higher costs of feed for cows. Kirin Holdings Co., Asahi Breweries Ltd. and Sapporo Holdings Ltd. plan to boost 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.
Smaller companies remain unable to pass on costs out of concern that sales may decline, 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.''
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