High cost of production hurting Japan firms

JAPAN'S annual wholesale inflation held near a 27-year high in August, matching expectations and reinforcing views that high raw material costs are hurting companies as the nation heads into a recession.

The data adds gloom to an already bleak outlook for the world's second-largest economy, whose longest post-war expansion has been a casualty of slowing global growth and high energy prices.

The 7.2 per cent rise in wholesale prices from a year earlier, as measured by the corporate goods price index (CGPI), followed a revised 7.3-per cent annual rise for July, which was the highest level since an 8.1-per cent rise marked in 1981 in the aftermath of the second oil shock.

"Despite recent falls in international commodity prices, the impact of past rises lingered," said Yasuhiro Onakado, chief economist at Daiwa SB Investments.

"The economy will remain in a tough spot in the short term," he said, noting that companies have not been able to fully pass on much of the cost increase to consumers.

Final goods prices charged to customers by businesses an approximate match for consumer inflation rose 2.1 per cent in August from a year earlier, the highest since a 2.7-per cent rise in May 1981, showing the pressure companies face as their wholesale costs rise much faster.

Accelerating wholesale inflation has hurt many Japanese firms, which have been unable to pass on much of the cost increase to prices of their products given weak consumption.

Government officials say the economy, which shrank in the second quarter at its sharpest rate in seven years, is either heading into a recession or already in one.Reuters