July 25 (Bloomberg) -- Japan's consumer prices probably fell for a fifth month, undermining the central bank's case that inflation will take hold and interest rates need to be raised.

Core consumer prices, which exclude fresh food, dropped 0.1 percent in June from a year earlier, according to the median estimate of 44 economists surveyed by Bloomberg. Prices fell at the same pace in the preceding two months. The statistics bureau will release the report on July 27 at 8:30 a.m. in Tokyo.

Bank of Japan Governor Toshihiko Fukui said this month that core prices will ``definitely'' resume rising in the long term and the bank should increase the key rate, the lowest among major economies, to sustain economic growth. Policy makers will probably raise rates in August, even before prices start gaining.

``Inflationary pressure is mounting but has yet to appear in the core price index,'' said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. ``Falling core prices won't prevent the Bank of Japan from taking forward-looking action.''

Japanese companies are gradually passing rising costs of crude oil and materials such as agricultural commodities onto retail prices. Rengo Co., an Osaka-based paper maker, this week said it will raise prices of cardboard and other paper by at least 15 percent from Sept. 1 to meet higher costs. QP Corp. and Ajinomoto Co. increased prices of mayonnaise this month to reflect costlier edible oil.

`Painfully Slow'

That hasn't been enough to reverse the slide in core prices.

``Such pass-through seems painfully slow, suggesting that there still is slack in the final product market,'' said Hiroshi Shiraishi, economist at Lehman Brothers Japan Inc., who predicts a 0.2 percent drop. Still, the decline ``would in itself be unlikely to stop the BOJ from hiking rates in the near future.''

Investors yesterday saw a 68 percent chance of a rate increase at the central bank's board meeting concluding Aug. 23, according to Credit Suisse Group calculations based on the exchange of interest payments.

Fukui said in May the drop in consumer prices is temporary and the bank can still tighten credit while they're falling.

``Expectations for an August rate hike are based on the notion that the Bank of Japan will raise rates regardless of core consumer prices,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo.

Rising prices of some everyday goods may spark consumers' expectations of inflation at a certain point and the central bank is monitoring this, Fukui said on July 12.

Inflationary Expectations

Inflationary expectations are increasing amid a surge in gasoline and food prices, according to a central bank survey of consumers. Some 72 percent of respondents expect prices to rise this year, compared with 59 percent in the previous quarter, the bank said in the quarterly report on July 18.

Core prices will climb 0.5 percent in the year ending March 2009 after gaining 0.1 percent this year, the central bank said in April. The bank may have to lower its forecast as some companies offer discounts to attract customers, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

KDDI Corp., Japan's second-biggest mobile-phone carrier, said last week that it will cut monthly fees by half because competition intensified, matching a move by larger rival NTT DoCoMo Inc.

``The chance is very slim that gains in core prices will accelerate through 2008,'' Ueno said.

The drop in core prices might have worsened to 0.2 percent in June, given that Tokyo core prices fell for the first time in three months, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. The capital's prices, which fell 0.1 percent in June, are regarded as a harbinger of nationwide numbers because they're released a month earlier.

*T ////

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Natl Natl

CPI Core CPI

YoY YoY ========================================================

Date of Release 07/27 07/27 Observation Period June June -------------------------------------------------------- Median -0.2% -0.1% Average -0.2% -0.1% High Forecast 0.1% 0.0% Low Forecast -0.3% -0.3% Number of Participants 41 44 Previous 0.0% -0.1% -------------------------------------------------------- ABN Amro Securities --- -0.1% Action Economics -0.2% -0.1% AIG Global Investment -0.2% -0.1% Barclays Capital Japan -0.2% -0.1% BNP Paribas Securities -0.2% -0.1% Calyon -0.2% --- Capital Economics Ltd -0.1% -0.1% CFC Seymour -0.1% -0.2% Commerzbank -0.2% -0.2% Credit Suisse -0.2% -0.1% Dai-Ichi Life Research -0.2% -0.1% Daiwa Research Institute --- -0.1% Daiwa SB Investments -0.1% -0.1% Daiwa Securities SMBC 0.0% -0.1% Dekabank -0.2% -0.1% Deutsche Securities 0.0% -0.2% Dresdner Kleinwort -0.2% -0.1% Forecast --- -0.2% Fortis 0.1% 0.0% Goldman Sachs -0.1% -0.1% HBOS Treasury Services plc -0.1% --- HSBC Holdings -0.1% -0.2% IDEAglobal --- -0.1% Informa Global Markets -0.2% -0.2% ING Bank NV -0.2% -0.2% Intesa Sanpaolo -0.2% -0.2% J.P. Morgan Securities Asia -0.2% -0.1% Japan Research Institute --- -0.1% Lehman Brothers -0.1% -0.2% Macquarie Securities -0.1% -0.1% Mitsubishi Research Institute -0.2% -0.1% Mitsubishi UFJ Resrch & Consul -0.3% -0.2% Mitsubishi UFJ Securities -0.3% -0.2% Mizuho Research Institute -0.2% -0.1% Mizuho Securities -0.2% -0.2% Morgan Stanley -0.2% -0.1% Nikko Citigroup -0.1% -0.1% NLI Research Center -0.2% -0.1% Nomura Securities Research -0.3% -0.2% Norinchukin Research Institute -0.1% -0.1% RBS Securities -0.2% -0.2% Ried, Thunberg & Co. -0.2% --- Shinkin Asset Management --- -0.2% Shinko Research -0.1% -0.1% Societe Generale -0.2% -0.2% Thomson Financial/IFR -0.3% -0.3% UBS Securities -0.1% -0.1% ========================================================

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

Last Updated: July 24, 2007 11:05 EDT