(Recasts, adds output gap, byline)
By Hideyuki Sano
TOKYO, Dec 12 (Reuters) - A spike in oil prices boosted Japanese wholesale inflation to its highest in more than a year, but that hardly helped the central bank’s case for a rate hike as rising costs threaten to strain profits at Japanese companies.
The price data suggests that consumer prices, too, will likely rise in coming months as firms pass on part of their rising costs, after a long period of tame advances.
But most economists said consumer prices are unlikely to accelerate sharply in view of limited wage growth.
“The uptrend in wholesale price inflation is strengthening,” said Takehito Sato, an economist at Morgan Stanley. “That could worsen terms of trade of Japanese firms, especially at small and mid-sized ones.”
The corporate goods price index (CGPI), which tracks wholesale prices, rose 2.3 percent in November from a year earlier, above economists’ median forecast of a 2.1 percent rise and the sharpest annual jump since September 2006.
Economists worry that recent rises in raw materials and food prices will squeeze profits at many companies, which are reluctant to pass on rising costs to consumers, for fear of scaring away already wary consumers.
Japanese financial markets showed muted reaction to the data, but Tokyo share prices and Japanese government bond yields fell after a sharp drop in U.S. shares that followed a disappointing U.S. rate cut on Tuesday, while expectations of a Bank of Japan rate hike retreated further. [JP/] [.T]
Swap contracts MIRS6 on the overnight call rate, the BOJ’s main policy rate, are pricing in less than a 10 percent chance of a rate hike by March, when BOJ Governor Toshihiko Fukui retires, down from around 20 percent late on Tuesday.
Part of the jump in oil prices will be passed on to consumers. Azusa Kato, an economist at BNP Paribas, said the wholesale price data suggests the core CPI will likely rise 0.4 to 0.6 percent from a year earlier in November and December. Morgan Stanley said the core CPI will rise at least 0.3 percent in November.
Either scenario would be much higher than the 0.1 percent rise in October, which followed eight straight months of decline.
Still, rising prices are unlikely to give the BOJ much ammunition to raise rates.
Not only is the credit crisis in the United States and Europe seen as tying the hands of the BOJ, but domestic growth prospects are also looking less solid.
Housing starts have plunged because of tighter regulations introduced after a building scandal, with no sign of a recovery.
The number of Japanese corporate bankruptcies rose 11.2 percent in November from a year earlier to 1,213 cases as failure of construction firms soared, a research firm said on Wednesday. [ID:nTKU002913]
Consumption has been tepid as wages have hardly grown despite growing corporate profits.
“On average, the economy shrank in the six months to September,” said Kato of BNP Paribas. “In such an environment, people cut spending to offset rising oil costs.”
The government also revised down Japan’s output gap, a measure of the economy’s supply and demand balance, to plus 0.2 percent in July-September from an initial estimate of plus 0.4 percent.
The downward revision came after taking into account revised gross domestic product data for the quarter released on Dec. 7.
The output gap stood at 0.2 percent in April-June after a reading of plus 1.0 percent in January-March.
The BOJ has said it will need to raise Japan’s super-low interest rates back to more normal levels from 0.5 percent now to avoid economic overheating, arguing that consumer prices will move up in the long run as the output gap is growing on the back of steady recovery in the economy.
The CGPI figures are based on a new series of data the BOJ released last week after a regular review it conducts once every five years.
The new data, based on prices in 2005, knocked an average of 0.7 percentage point off wholesale price inflation since 2006, the BOJ said, largely because the weighting on some raw materials was reset to a lower level.
Economists are now focusing on the BOJ’s tankan survey due on Friday, which is expected to show a small deterioration in Japanese business sentiment. [ID:nT89411]
Data released by the Ministry of Finance showed that Japan’s current account surplus rose 45.7 percent in October from the same month a year earlier, against economists’ median forecast for a 34.6 percent increase. [JPCURA=ECI] (Additional reporting by Yoko Nishikawa; Editing by Mike Miller)