Japan Consumer Prices Rise 0.1%, First Gain This Year

Japan's consumer prices unexpectedly rose for the first time since last December as oil and raw materials costs surged.

Core consumer prices, which exclude fresh food, climbed 0.1 percent in October from a year earlier, the government's statistics bureau said today in Tokyo. The median estimate of 40 economists surveyed by Bloomberg News was for no change.

The gain probably won't prompt the Bank of Japan to raise interest rates because falling wages are curbing consumer spending and economic growth. Deputy Governor Toshiro Muto said this month that the U.S. housing recession and market turmoil make it difficult to decide when to raise the key rate from 0.5 percent, the lowest among major economies.

Mounting risks for the economy are already reducing the chance of a rate hike, said Azusa Kato, an economist at BNP Paribas Securities Japan Ltd. in Tokyo. The improvement in core prices won't provide much support for the central bank's attempt to raise rates.

The jobless rate was unchanged in October after rising in each of the two previous months, the bureau said, matching the median estimate of economists. The rate has risen from a nine- year low of 3.6 percent in July. The number of jobs available for each applicant slumped to 1.02 in October from 1.05.

The yen traded at 109.71 per dollar at 8:44 a.m. in Tokyo from 109.84 before the reports were published.

Interest Rates

Expectations of a rate increase are already receding. Yields on the benchmark 10-year government bond fell to a two- year low last week.

Investment banks including Mizuho Securities Co., UBS AG and Goldman Sachs & Co. this month postponed predictions for the next rate increase from the first quarter of 2008 to at least the third quarter.

Financial markets will keep gyrating, probably more frequently than we've seen, said Yasunari Ueno, chief market economist at Mizuho Securities. It'll take time before fears about a credit crunch and economic recession ease and markets regain a more optimistic outlook.

Rising prices of crude oil, wheat and aluminum are squeezing profits and prompting more companies to pass on costs to customers.

Overcoming Deflation

Japan's central bank raised the benchmark overnight lending rate in July 2006 after holding it near zero for more than five years to overcome deflation. Policy makers doubled the rate to 0.5 percent in February and have kept it on hold since.

Excluding energy as well as food, consumer prices fell 0.3 percent in October. By that measure, prices have failed to rise for nine years.

Excluding oil, the momentum of consumer price increases is pretty weak, said Kato at BNP Paribas.

Tokyo's core prices, a harbinger of the nationwide index, rose 0.1 percent in November from a year earlier, the first increase in 10 months.

Crude oil prices touched a record $99.29 a barrel last week. Japan's regular gasoline prices averaged 150.2 yen a liter ($5.25 a gallon), the highest since the Tokyo-based Oil Information Center began collecting the data in 1987.

Source - Bloomberg