July 10 (Bloomberg) -- Japan’s producer prices fell at a record pace in June as oil costs declined and companies required fewer materials amid a global recession.

The costs companies pay for commodities and unfinished goods tumbled 6.6 percent from a year earlier after sliding a revised 5.5 percent in May, the Bank of Japan said today in Tokyo. The median estimate of 22 economists surveyed by Bloomberg News was for a 6.4 percent drop.

Today’s report may stoke concern that deflation will take hold and hamper a rebound from the nation’s worst postwar recession. Bank of Japan Governor Masaaki Shirakawa said this week that his policy board will watch out for the risk that the economy and prices will slip below its forecasts.

“Viewing the broader price trend in the domestic economy, we would have to stress that homemade deflationary pressures are strengthening,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

The year-on-year drop in costs was the biggest since the central bank started compiling the report in 1960. Prices fell 0.3 percent in June from May, when they declined a revised 0.5 percent, today’s report said.

Consumer prices excluding fresh food, the central bank’s preferred gauge of inflation, fell 1.1 percent in May from a year earlier, the sharpest decrease since comparable figures were first compiled in 1971. Corporate service prices dropped a record 3 percent.

Lower Prices

Expectations for lower prices ahead may prompt companies and consumers to delay purchases, eroding profits and forcing firms to cut wages. That would threaten an economy that’s only now starting to improve as industrial production and exports rebound from unprecedented declines in the first quarter.

Much of the drop in wholesale prices has been a reflection of record oil costs in 2008, and declines may moderate in coming months because crude plunged late last year, falling as low as $32.40 a barrel in December from $147.27 in July.

Producer prices will probably decline 7.5 percent in the year to March 2010 and 1.8 percent in the following 12 months, Bank of Japan board members forecast in April. Policy makers will review their forecasts for inflation and economic growth at their next board meeting on July 14-15.

“The pace of declines will peak in the summer, but the question is whether prices will get closer to positive territory as the central bank has anticipated,” said Mari Iwashita, chief market economist at Daiwa SMBC Securities Co. in Tokyo. “The bank will probably have to keep warning against downside risks for prices and the economy.”

Cost Increases

While oil is trading at less than half its July 2008 peak, the fossil fuel has climbed 36 percent this year, prompting some manufacturers to pass cost increases onto their customers.

Idemitsu Kosan Co., an oil refiner and chemical maker, this month raised prices of resolvent for paint and adhesive by about 10 percent, the first increase in a year. Sumitomo Chemical Co. increased prices of resin used to make plastic bags and auto parts in response to rising naphtha costs.

“The rebound in fuel and material costs threatens to squeeze corporate profits, which are already being eroded amid the prolonged recession,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Companies are losing support from the terms of trade.”

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

Last Updated: July 9, 2009 20:03 EDT