UPDATE 3-Japan annual wholesale inflation near 27-yr high

(For more stories on the Japanese economy, click [ID:nECONJP])
(Adds revised GDP poll)

By Leika Kihara

TOKYO, Sept 10 (Reuters) - Japan's annual wholesale inflation
held near a 27-year high in August, matching expectations and
reinforcing views that high raw material costs are hurting
companies as the nation heads into a recession.

The data adds gloom to an already bleak outlook for the
world's second-largest economy, whose longest post-war expansion
has been a casualty of slowing global growth and high energy
prices.

Japan's economy is expected to have contracted 0.8 percent in
the three months to June, a deeper decline than the government's
initial reading of a 0.6 percent contraction, according to a
Reuters poll. [ID:nT300912]

The 7.2 percent rise in wholesale prices from a year earlier,
as measured by the corporate goods price index (CGPI), followed a
revised 7.3 percent annual rise for July, which was the highest
level since an 8.1 percent rise marked in 1981 in the aftermath
of the second oil shock.

"Despite recent falls in international commodity prices, the
impact of past rises lingered," said Yasuhiro Onakado, chief
economist at Daiwa SB Investments.

"The economy will remain in a tough spot in the short-term,"
he said, noting that companies have not been able to fully pass
on much of the cost increase to consumers.

Final goods prices charged to customers by businesses -- an
approximate match for consumer inflation -- rose 2.1 percent in
August from a year earlier, the highest since a 2.7 pct rise in
May 1981, showing the pressure companies face as their wholesale
costs rise much faster.

Accelerating wholesale inflation has hurt many Japanese
firms, which have been unable to pass on much of the cost
increase to prices of their products given weak consumption.

CONTRACTING ECONOMY

Government officials say the economy, which shrank in the
second quarter at its sharpest rate in seven years, is either
heading into a recession or already in one, at least under a
Japanese definition of a downturn in the economic cycle.

Revised GDP figures for April-June, due out at 8:50 p.m. on
Friday (2350 GMT Thursday), will likely show the economy shrank
more than initially forecast on weakness in capital spending.

Japan's index of coincident economic indicators rose in July
as expected, reflecting improvements in industrial output and
retail sales figures, data showed on Wednesday.

But the government maintained its assessment on the index,
saying that it suggested Japan's economy was worsening. The
phrase is defined as a provisional judgment that the economy is
likely to be in a recession.

The wholesale price data did not alter much the dominant
market view that the Bank of Japan will hold off on raising
interest rates from the current 0.5 percent until later next
year.

Analysts say Japanese wholesale inflation may soon slow as
crude oil prices have recently turned down from their peak in
mid-July to mark a five-month low on Tuesday, with the dollar's
rebound driving investors away from commodities.

"For now, wholesale inflation is likely to ease but consumer
inflation will probably remain high as companies have so far not
fully passed on rises in costs," said Junko Nishioka, economist
at RBS Securities.

"That will marginally improve terms of trade for companies,
but given the huge gap (in the rise in wholesale and consumer
inflation), that will only slightly ease the negative effect and
will not drastically improve corporate earnings," she added.

The BOJ is widely expected to keep interest rates unchanged
at a two-day policy board meeting that ends next Wednesday.

Separate data showed Japan's current account surplus shrank
17.3 percent in July from a year earlier, compared with a
consensus forecast of a 28.7 percent decrease, partly as high
energy costs inflated the nation's import bills.
(Additional reporting by Yuzo Saeki and Shigeo Kodama; Editing
by Hugh Lawson)