June 26 (Bloomberg) -- Japanese corporate service prices rose at the fastest pace in more than nine years in May, backing the central bank's case that inflation will take hold in the world's second-largest economy.

Corporate service prices climbed 1.4 percent from a year earlier, the steepest gain since December 1997, the Bank of Japan said in Tokyo today. The prices only began rising in August after eight years of declines.

Faster growth in the costs companies pay for services such as transportation and rent may prompt them to raise prices, sparking inflation. Central bank Governor Toshihiko Fukui has said consumer prices, which fell in April for a third month, will rise over the long term.

``The strong gains we've been seeing in corporate service prices show that prices are starting to heat up,'' said Takuji Aida, chief Japan economist at Barclays Capital in Tokyo. ``It's only a matter of time before these gains are reflected in consumer prices.''

Fukui said on May 17 that it's possible for the central bank to raise interest rates even with falling consumer prices, as long as policy makers are confident about the outlook for the economy and inflation. Japan's benchmark overnight lending rate is 0.5 percent, the lowest among major economies.

Consumer prices probably fell 0.1 percent in May from a year earlier, the same drop recorded in April, according to the median estimate of 45 economists surveyed by Bloomberg News. The report is scheduled for release on June 29.

Producer Prices

Higher costs of energy and raw materials are driving up Japan's wholesale prices of goods as well as services. Producer prices climbed 2.2 percent in May from a year earlier, a 39th month of gains.

The central bank's overseas commodity index of 16 raw materials, including crude oil and copper, climbed 3.7 percent in May from a year earlier, a fourth monthly gain.

To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net; Harumi Ichikura in Tokyo at hichikura@bloomberg.net

Last Updated: June 25, 2007 20:28 EDT