Oct. 14 (Bloomberg) -- Japan’s producer prices fell for a ninth month as oil traded lower than last year’s levels and demand for materials waned.

The costs companies pay for energy and unfinished goods declined 7.9 percent in September from a year earlier after sliding a record 8.5 percent, the Bank of Japan said today in Tokyo. The median estimate of 27 economists surveyed by Bloomberg News was for a 7.9 percent drop.

While the pace of declines eased because oil prices peaked in July 2008, weak demand from companies for energy and raw materials will weigh on prices, economists said. A return to the deflation that the economy only shook off in 2005 may weigh on growth as businesses and households cut spending in anticipation that prices will keep falling.

“Deflation caused by the domestic demand shortage will become evident gradually as time passes, and the wave of price declines will spread,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo.

Producer prices rose 0.1 percent in September from August, the central bank said today.

Bank of Japan policy makers will probably forecast that declines in consumer prices will extend into 2011 when they publish economic forecasts on Oct. 30, analysts say.

The central bank’s overseas commodity index, which shows changes in costs of materials including oil, steel, copper and wheat, slid 23.6 percent in September from a year earlier, slowing for a third month. Crude oil reached an unprecedented $147.27 a barrel last July, and has dropped more than 50 percent since then.

Yen’s Advance

The yen’s 11 percent gain against the dollar in the past six months has also contributed to price declines by making imports cheaper.

The government will cut prices of the grain sold to domestic flour millers by the most in at least 39 years as import costs dropped on a stronger currency and a slump in international prices, the Ministry of Agriculture, Forestry and Fisheries said this month.

The reduction will lower costs for Nisshin Seifun Group Inc., Japan’s biggest flour miller, and Yamazaki Baking Co. and may encourage them to reduce prices.

“Cheaper wheat costs will prompt food companies to cut prices,” said Taisuke Nakamoto, an economist at Dai-Ichi Life Research Institute in Tokyo. “Downward pressure on prices from weak demand will linger.”

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

Last Updated: October 13, 2009 20:01 EDT