March 11 (Bloomberg) -- Japan’s wholesale prices fell at a faster pace in February as the global recession cut the cost of energy and commodities.

Producer prices, the costs companies pay for energy and raw materials, sank 1.1 percent in February from a year earlier, after falling a revised 0.3 percent in January, the Bank of Japan said in Tokyo today. That compares with a median estimate of 27 economists surveyed by Bloomberg News for a 1.2 percent decline.

Sliding commodity costs, coupled with what economists say may become Japan’s the deepest recession since 1945, may herald a return to deflation that plagued the nation for almost a decade until 2005. In China, both consumer prices and producer prices dropped last month as global growth cooled.

“Given the drastic pace of the economy’s decline, we should assume deflation will become a big headache for the Japanese economy later this year,” said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. Adachi said the drop in prices also reflected the surge in commodity prices a year ago.

Producer prices fell 0.4 percent in February from January, when they declined a revised 1.1 percent, the central bank said today.

An unprecedented drop in exports since last quarter has forced Japanese manufacturers to cut production at a record pace and fire thousands of workers, cooling investment and consumption.

Bank of Japan

Governor Masaaki Shirakawa and his policy board in January forecast the economy will shrink 2 percent in the year starting April 1, the worst performance in 60 years. They also predicted consumer prices excluding fresh food will drop 1.1 percent and producer prices will decline 6.4 percent in the year.

“Whether the economy’s decline will hit bottom later this year is crucial for predicting whether Japan can avert a deflationary spiral” in which price declines hurt economic growth and lead to more drops in the costs, said Hiroshi Shiraishi, an economist at BNP Paribas in Tokyo.

The Bank of Japan’s overseas commodity index, which shows changes in costs including oil, steel, copper and wheat, slid 51.8 percent in February, after falling a 47.5 percent in January.

Wholesale inflation rose to the fastest in almost three decades in July and has since tumbled. Crude oil has lost more than two-thirds of its value since peaking at $147.27 in July. Soybeans, corn and wheat costs have dropped after climbing to records last year.

Japan, which imports about 90 percent of its wheat needs, will cut prices of the grain sold to millers by 14.8 percent on average in April, the first reduction in three years, the government said last month.

The output gap, a measure of the difference between supply and demand in the economy, fell the most in seven years last quarter. Economists say the gauge, an indicator of deflation, will widen as the recession deepens.

“Price declines will accelerate through the middle of this year, in tandem with the deterioration in the economy’s output gap,” said Junko Nishioka, an economist at RBS Securities in Tokyo.

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

Last Updated: March 10, 2009 19:55 EDT