May 14 (Bloomberg) -- Japan's wholesale prices rose at close to the fastest pace in almost three decades in April, prompting companies to pass higher costs onto clients or absorb them by sacrificing profits.

Producer prices climbed 3.7 percent from a year earlier, after a 3.9 percent gain in March, the Bank of Japan said in Tokyo today. The median estimate of 32 economists surveyed by Bloomberg News was for 3.6 percent.

Bonds fell on speculation that the central bank may raise rates this year to quell inflation. Governor Masaaki Shirakawa said higher costs and slower growth overseas are the biggest risks for Japan.

``With consumer spending weak and profits waning, the economy has to keep relying on foreign demand,'' said Seiji Adachi, a senior economist at Deutsche Securities Inc. in Tokyo. ``Rising prices are making Japan's economy unstable.''

The yield on the benchmark 10-year bond rose 11.5 basis points to 1.695 percent. The yen traded at 104.73 per dollar at 11:21 a.m. in Tokyo, from 104.68 before the report was released.

``Inflation is more of a problem than we thought and it's global,'' said John Richards, head of debt markets strategy for Asia at RBS Securities Japan Ltd. in Tokyo.

Prices rose 0.6 percent from March, the report said, the seventh month of gains.

Spurring Inflation

Economic growth in China, India and Russia has increased demand for energy and commodities, spurring inflation around the world. Oil prices rose to a record $126.98 today. The central bank's overseas commodity index of 16 raw materials including crude oil, nonferrous metal and wheat, soared 45.4 percent in April from a year earlier.

The central bank last month slashed its growth estimate and shelved a policy of gradually raising borrowing costs. Policy makers said in a semi-annual report that wholesale inflation will probably rise 2.5 percent in the year ending March 2009 and consumer prices will climb 1.1 percent. At the same time, the bank cut this fiscal year's economic growth forecast to 1.5 percent from 2.1 percent.

``The BOJ seems to place more weight on the risk higher commodity prices might pose to economic growth than on higher inflation in Japan,'' said Takuji Okubo, senior economist at Merrill Lynch & Co. in Tokyo.

The bank ``is likely to wait until the end of 2009 to raise its policy rate,'' Okubo said. Merrill last week cut its 2009 growth estimate for Japan because of costlier commodities.

Taiheiyo Cement Corp., Japan's biggest maker of the material, and Ube Industries Ltd., raised cement prices last month as imported coal prices surged.

Weighing on Profits

``Rising costs are seriously weighing on our profits,'' Kimitaka Ando, a Taiheiyo Cement spokesman, said last month. ``We just can't ship products by incurring losses.''

Profit of Sumitomo Metal Industries Ltd. and Kobe Steel Ltd. slid about a fifth in the year ended March because of costlier iron ore and coal.

Price gains are spreading to daily necessities, putting pressure on retail inflation. Consumer prices excluding fresh food rose 1.2 percent in March, the fastest pace in a decade.

Fifty-eight percent of Japanese restaurant chains plan to raise prices this year to pass on higher food costs, according to a Nikkei newspaper survey. Thirteen percent of the 328 respondents said they plan to raise prices on all menu items.

Still, economists say that's not enough to prompt the Bank of Japan to raise interest rates this year.

Consumer Prices

Central bank policy makers consider consumer prices to be stable when inflation is between zero and 2 percent. There'll be little deviation from the range this fiscal year and in the following 12 months, Governor Shirakawa said.

``The Bank of Japan won't be prompted to tighten monetary policy to push down inflation in the short term, even if core prices get closer to the upper end of the range,'' said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. ``That's an important message.''

Gains in wholesale inflation last month were limited by the expiry of a gasoline tax on March 31 after a disagreement between the ruling and opposition parties. The expiry probably pushed down producer prices by about 0.4 percentage point, according to Yasukazu Shimizu, a senior economist at Mizuho Securities Co. in Tokyo. The tax was reinstated on May 1.

Higher oil and commodities pushed the import bill to a record in March, causing the current-account surplus to narrow for the first time in three months, a separate report today showed.

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

Last Updated: May 13, 2008 22:29 EDT