Producer Prices Increase for Second Month on Higher Commodity Expenses

Japan’s producer prices rose for a second month in June, driven by an increase in commodity costs that may do little to arrest deflation.

The amount companies pay for energy and unfinished goods climbed 0.5 percent from a year earlier after advancing a revised 0.5 percent in May, the Bank of Japan said today in Tokyo. The median forecast of 22 economists surveyed by Bloomberg News was for a 0.6 percent increase.

Demand from emerging economies including China is driving up material prices for Japanese companies, which are struggling to pass the increases on to customers who are used to obtaining cheaper goods. Manufacturers expect wholesale prices will rise over the next quarter while their sale prices keep sliding, the central bank’s Tankan survey showed this month.

“The problem of input-price inflation and output-price deflation will persist,” Hiroshi Watanabe, a senior economist at the Daiwa Institute of Research in Tokyo, said before the report. “Narrowing margins are a blow to companies because cost-cutting is a major boost for their earnings now.”

The yen traded at 88.78 per dollar at 8:56 a.m. in Tokyo from 88.80 before the figures were published.

Central bank Governor Masaaki Shirakawa said last week that the world’s second-largest economy will keep expanding on rising overseas demand, while adding that the pace of exports and production will gradually slow. The bank will keep a “very accommodative” policy to combat price declines, he added.

Weak Domestic Demand

“There are still few signs that domestic demand will gather steam and take over as the engine of Japan’s expansion,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “It will take considerable time before deflation is overcome.”

Some companies are managing to pass on higher costs.

JFE Holdings Inc., Japan’s second-largest steelmaker, said last month that it expects automakers and other customers to pay more as iron ore will probably climb more than 20 percent and coal will increase 12 percent in the third quarter. JFE “will be able to cover most of the cost rises” by raising steel prices, Eiji Hayashida, president of the Tokyo-based company, told reporters last month.

Raw-material prices have slipped recently amid concern that the European debt crisis will curtail global growth. Oil dropped about 12 percent since the end of April. The Bank of Japan’s overseas commodity index, a gauge of costs of materials including oil, steel, copper and wheat, rose 8.8 percent in June from a year earlier, the slowest pace in nine months.

Catch-22

“Commodity price gains may decelerate as growth in emerging countries cools, but that would also mean Japan’s export-driven recovery will lose momentum, making it more difficult for companies to pass on costs,” Daiwa’s Watanabe said. “Japan is stuck in a Catch-22 situation.”

Producer prices fell 0.4 percent in June from May, when they climbed a revised 0.2 percent, the central bank said today.

Bank of Japan policy makers forecast in April that producer prices will climb 1.3 percent in the year ending March 2011, while consumer prices excluding fresh food will slide 0.5 percent. The board members will update their forecasts for prices and economic growth on July 15, when they announce a monetary policy decision.

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

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