Dec. 12 (Bloomberg) -- Japan's wholesale prices rose at the fastest pace in 14 months in November as oil surged to a record, squeezing profits of companies unable to pass costs to clients.

Prices companies pay for energy and raw materials climbed 2.3 percent from a year earlier, after a revised 2 percent gain in October, the Bank of Japan said in Tokyo today. The increase was faster than the 2.1 percent median estimate of 38 economists.

Profits fell for the first time in five years last quarter because higher energy costs wiped out margins. Some companies, including Meiji Dairies Corp., are managing to raise prices of everyday items, eroding the spending power of consumers.

``Corporations are passing on only a fraction of rising costs and seeing profits eroded,'' said Ryutaro Kono, chief economist at BNP Paribas in Tokyo. ``Companies that can't endure the cost burdens any longer are raising prices, and that's hurting household sentiment.''

The yen traded at 111.04 per dollar as of 2:35 p.m. in Tokyo from 110.76 before the report was published.

More than three years of wholesale inflation have yet to feed into higher consumer prices and wages. Consumer prices excluding fresh food rose 0.1 percent in October, the first gain this year, and wages were unchanged.

Cost-Driven

Japan has struggled with deflation for a decade, and the inflation that's emerging is driven by costs rather than demand from households, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. The areas where retail prices are increasing -- food and gasoline -- helped consumer confidence sink to the lowest level in almost four years in November.

Gasoline prices at the pump soared to a record 154.9 yen a liter ($5.29 a gallon) last week, after crude oil surpassed $99 a barrel for the first time in November. Japan imports virtually all of its oil.

Taxis in Tokyo and Yokohama raised fares for the first time in 10 years last week. Meiji Dairies and Morinaga Milk Industry Co. this week said they'll raise milk prices next year for the first time in 30 years as higher costs of grains, petroleum and other raw materials add to production costs.

Rising oil prices are adding to transportation expenses as well as costs of running factories, said Junichiro Takeuchi, a Bank of Japan official. About 54 percent of the 855 items the bank surveyed rose in November, compared with 46 percent at the start of the year, according to the central bank.

More Pessimistic

Small businesses, which employ seven in 10 of the nation's workers, became more pessimistic for the third straight quarter, economists predict the central bank's Tankan survey to show on Dec. 14. Confidence among large manufacturers will probably slip for the first time since March.

The government yesterday announced measures to support small businesses hurt by higher oil prices, including postponing debt repayments. It said large companies should avoid forcing subcontractors to absorb rising costs.

``It is already tough for firms to pay higher wages,'' Morgan Stanley's Sato said. He yesterday slashed his growth forecast for 2008 in half to 0.9 percent.

Bank of Japan Governor Toshihiko Fukui said last week that he's closely watching the risk that the deterioration in small companies' profits may hamper wage growth and consumption. The bank will hold off raising its key interest rate from 0.5 percent, the lowest among major economies, until at least the second quarter of 2008, according to 21 of 30 economists surveyed by a government think tank.

By a Thread

``The BOJ's hope of raising rates again this fiscal year are hanging by a thread,'' said Tetsufumi Yamakawa, a former central bank official and now chief economist at Goldman Sachs Group in Tokyo. ``Fukui and other board members have been emphasizing downside risks to U.S. and other overseas economies, but there are innumerable risks to the domestic economy.''

The central bank this month recalculated producer prices by changing the base year to 2005 from 2000 and reshuffling some of items it surveys. The change, made every five years to more accurately reflect price trends, lowered last fiscal year's average gains by 0.7 percentage point to 2.1 percent.

A separate report today showed that Japan's current-account surplus, the nation's broadest gauge of trade, widened in October. The surplus rose 45.7 percent to 2.23 trillion yen from a year earlier, the Finance Ministry said. Exports rose 13.7 percent in the month and imports climbed 8.3 percent, to a record, spurred by the increase in energy costs.

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

Last Updated: December 12, 2007 00:37 EST