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Japan's Producer Prices Rose for 13th Month in March (Update4)

Japan's Producer Prices Rose for 13th Month in March

April 13 (Bloomberg) -- Japan's producer prices rose for a 13th month in March, eroding profits at companies struggling to pass on costs after almost seven years of consumer price deflation.

An index of prices of energy and raw materials in the world's second-largest economy rose 1.4 percent from a year earlier, a Bank of Japan report showed today in Tokyo. The median forecast of 32 economists surveyed by Bloomberg News was for the increase to match February's 1.3 percent gain.

``Rising costs of energy and materials are the No. 1 risk for the Japanese economy now,'' said Hiroshi Watanabe, an economist at Daiwa Institute of Research, one of seven to accurately predict the increase. ``Less corporate profit means less investment by companies.''

Higher costs of oil products, metals and other commodities are leaving companies with less to invest in equipment and hiring, threatening to sap a recovery from recession. Nestle Japan Holding Ltd. and Toyota Motor Corp. say they are having trouble covering costs by raising prices.

``We are trying not to pass rising coffee prices on to consumers, because they won't accept the raise,'' Jose Lopez, chief executive of Kobe-based Nestle Japan, a unit of Nestle SA, the world's largest food company, said in an interview on April 6.

The price of Robusta, used in instant coffee, rose to a five- year high of 12,720 yen ($118) per 100 kilograms in Tokyo on March 16 on concerns that dry weather might damage the crop in Vietnam, the world's largest supplier of the variety.

Business Sentiment

Prices of gasoline and oil products rose 16.5 percent in March, contributing half of the overall increase. Prices of chemicals rose 6.8 percent, and steel costs gained 12.4 percent.

``It would be difficult to raise the retail prices of our vehicles just because our costs are getting higher due to higher steel costs,'' Fujio Cho, president of Toyota City-based Toyota Motor, Japan's largest automaker, told reporters on March 22.

Gasoline and kerosene futures in Tokyo rose to a record on April 5. Gasoline for October delivery gained 1,100 yen, or 2.3 percent, to 49,460 yen a kiloliter, and kerosene rose 2.8 percent, to 49,750 yen a kiloliter.

Higher costs are hurting business sentiment. Confidence among manufacturers with more than 1 billion yen in capital fell to the lowest in a year in March, the Bank of Japan's Tankan survey showed this month. The confidence index fell to 14 points from 22 in December.

Profit Outlook

Manufacturers forecast that profit growth will slow to 1.1 percent in the year started April 1 from a projected 25 percent gain last business year as costs rise, the Tankan showed.

Japan's core consumer prices, which exclude fresh food, have risen in just one month since April 1998, sapping profits. The central bank has vowed to keep interest rates at almost zero until core prices rise for at least a few months and policy makers are sure prices won't resume declining.

``The price of wheat is high, and that is eroding profits of food companies,'' Yuji Okabe, president of Tokyo-based distiller Mercian Corp., said in an interview on April 4. ``Consumer spending won't pick up for two to three years.''

Bank of Japan Governor Toshihiko Fukui said on April 6 that producer price increases will probably accelerate, while consumer prices extend their declines.

``The closer a company is located to consumers in the supply chain, the harder it becomes for them to pass on rising costs,'' said Yasukazu Shimizu, a senior economist at Mizuho Securities Japan Co. in Tokyo. ``Japanese consumers just won't buy if prices are raised.''

Economic Recovery

Japan slipped into its fourth recession in 13 years last year as export growth slowed and consumer spending stalled. The economy recovered in the fourth quarter, growing at a 0.5 percent annual pace.

Fukui told parliament on April 7 that rising oil prices are more likely to sap the economy by curtailing demand in the nation's export markets than helping to end deflation.

``Even if crude oil price gains somewhat work to raise consumer prices, they may also slow Japan's economic growth by slowing global economic growth and delay an end to deflation,'' Fukui said.

Japanese companies may get some relief from a recent decline in oil. Crude oil and gasoline futures in Tokyo today fell as much as 4.2 percent after the International Energy Agency cut its forecast for world fuel demand.

For the fiscal year ended March 31, producer prices increased 1.5 percent, the first gain since the year ended March 1998, when Japan raised the sales tax to 5 percent from 3 percent, the central bank said.

Producer prices rose 0.3 percent in March from February, today's report said. The monthly figure isn't adjusted for seasonal variations.


To contact the reporter responsible for the story:
Mayumi Otsuma in Tokyo at [e-mail].

To contact the editor responsible for the story:
Christopher Wellisz [e-mail]


LINK: http://www.bloomberg.com/apps/news?pid=10000080&refer=asia&sid=aceiEs5I.IjM