Spiralling food and gas costs threaten Japan's growth rate

By Mayumi Otsuma  |   2008-7-26  |     NEWSPAPER EDITION

JAPAN'S consumer prices rose at the fastest pace in a decade as food and gasoline costs climbed, squeezing household budgets and slowing economic growth, figures released yesterday show.

Core prices, which exclude fruit, fish and vegetables, increased 1.9 percent from a year earlier after gaining 1.5 percent in May, the statistics bureau said yesterday in Tokyo.

Higher prices are forcing consumers and companies to cut spending, threatening the economy's longest postwar expansion, Bloomberg News reported.

Bank of Japan board member Atsushi Mizuno said yesterday that the benchmark interest rate should stay at 0.5 percent for now because growth is slowing. "The BOJ isn't concerned with the inflation rate itself. They're concerned about the impact of prices on growth," said Hiroshi Shiraishi, an economist at Lehman Brothers in Tokyo. "They're not going to raise rates. They're going to be patient and wait to see if global growth or wages pick up."

The yield on Japan's 10-year bond fell 7.5 basis points to 1.575 percent after slumping United States home sales and German business confidence intensified concern that global growth will falter.

Weaker consumption and exports probably caused the world's second-largest economy to shrink last quarter, according to economists.

Shipments abroad fell for the first time in more than four years in June, and a report next week may show industrial production declined for two straight quarters for the first time since the most recent recession in 2001.

Inflation is soaring across the Asia-Pacific region, reports showed this week, complicating policy for central banks as economic growth cools.

Malaysia's consumer prices rose at the fastest pace in 26 years in June. In Australia, the inflation rate surged to a two-year high in the second quarter.

The BOJ is unlikely to raise rates even if inflation exceeds 2 percent, the higher end of the policy board's range for price stability, said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co in Tokyo.

"Core prices will exceed the range's higher end soon," said Kanno, who used to work at the Bank of Japan. "Even so, there's little chance for the central bank to raise rates because wages are barely growing and price gains aren't spreading to the overall economy."

Governor Masaaki Shirakawa and his colleagues will keep the key rate, the lowest among major economies, on hold this year, according to 31 of 33 economists surveyed by Bloomberg News this month.

The bank cut its growth forecast last week.

"I'm concerned about the combination of slower growth and high prices," Economic and Fiscal Policy Minister Hiroko Ota said. "Consumers are increasingly conscious of inflation and we're concerned about the effect that's having on sentiment," Ota said.