Japan's Wholesale Inflation Hits 27-year High

Manufacturing sector hurting as well

While consumer confidence struck a new record low, Japanese wholesale inflation hit a 27-year high in July, official figures showed August 12, adding to gloom about the health of Asia's largest economy. The flurry of soft data came on the eve of a key report that is expected to show Japan's economy shrank in the second quarter of 2008, teetering on the brink of recession.

The prices of goods traded between companies jumped 7.1% last month, the sharpest increase since an 8.1% rise in January 1981, when the nation was reeling from the second oil shock, the Bank of Japan said.

The government's consumer confidence index fell to 31.4 in July, down from 32.6 in June and the lowest level since comparable records began 26 years ago.

Companies are struggling to pass on higher oil and material costs to consumers due to weak domestic demand, said Hiroshi Watanabe, an economist at the Daiwa Institute of Research. "If they raise prices, they may see demand drop. Or they can opt for a higher market share with no price hikes, which only large corporations can survive. They are in trouble either way," he said.

Business investment has been a key driver of Japan's recovery from recession in the 1990s, but there is now concern that companies may scale down spending on new equipment and factories to cope with surging costs. Japan's industrial output fell 2.2% in June from the previous month, more than previously thought, as firms struggled to cope with weaker demand and soaring costs, the government reported Tuesday.

While raw material prices soared 48.6% in July, the prices of finished goods rose just 1.6%.

Prices surged 43.6% for petroleum and coal products, 26.7% for iron and steel and 8.1% for electricity, gas and water.

Even Japan's key manufacturing industries are hurting. "Profit margins are getting slimmer for companies in sectors such as electrical machinery or automobiles as consumer spending is weak," said Hiromichi Shirakawa, chief Japan economist at Credit Suisse. Recent drops in the price of crude oil and other commodities, however, have provided some rays of hope for Japanese manufacturers.

Japan's core inflation rate hit a fresh decade-high of 1.9% in June as consumer prices rose for a ninth straight month.

Wholesale inflation is likely to remain high for the time being but start to ease towards the year-end, according to Lehman Brothers economist Kenji Abe. "Commodity prices including oil have declined significantly recently. In addition, the economy now clearly appears to be on a downswing, and weakening domestic demand should weigh on final-product prices," he predicted.

Copyright Agence France-Presse, 2008

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