April 25 (Bloomberg) -- Japan's consumer prices rose at the fastest pace in a decade in March as companies passed on higher costs of gasoline and food to protect profits.
Core prices, which exclude fresh fruit, fish and vegetables, climbed 1.2 percent from a year earlier after gaining 1 percent in February, the statistics bureau said in Tokyo today.
Bonds fell as traders increased bets that the Bank of Japan will raise interest rates from 0.5 percent later this year to quell inflation. Governor Masaaki Shirakawa and his colleagues will probably stick to their policy of gradually increasing borrowing costs in their twice-yearly outlook next week, former central bank official Masaaki Kanno said.
``Core prices will continue to gain, spurred by crude oil and food,'' said Kanno, now chief economist at JPMorgan Securities Japan Co. in Tokyo. ``The Bank of Japan will probably suggest it maintains the basic stance of normalizing monetary policy and will raise interest rates eventually unless the external environment deteriorates.''
The yield on Japan's five-year bond rose 15.5 basis points, the most in more than four years, to 1.2 percent as of 11:30 a.m. in Tokyo. The yen traded at 104.22 per dollar from 104.34 before the report. The gain in core prices matched the median estimate of economists surveyed.
Expectations Evaporated
Expectations that the bank will cut the key rate, the lowest among major economies, evaporated in the past month.
Investors see a 66 percent chance of a rate increase by December compared with 38 percent before today's report, according to JPMorgan Chase & Co. calculations. As recently as March 20, traders priced in a 71 percent likelihood of a cut.
The central bank will probably increase its projection for core-price increases from 0.4 percent in the outlook report on April 30, economists say.
``The Bank of Japan will probably warn that costlier commodities and food may accelerate price increases more than expected,'' said Junko Nishioka, a senior economist at ABN Amro Securities in Tokyo. ``The bank's message will be, `we'd like to resume normalizing interest-rate levels eventually.'''
Still, economists also predict policy makers will lower their growth forecast from 2.1 percent for the year ending March 2009. Costlier oil and commodities are squeezing companies and households, smothering growth just as a U.S. slowdown cools Japan's export-led expansion.
Bad Inflation
Economic and Fiscal Policy Minister Hiroko Ota said Japan's inflation ``isn't at all a good thing'' because it's being driven by higher energy prices rather than demand. The country is still struggling to stamp out deflation, she said today.
Core consumer prices resumed rising in October after declining for eight months. They either hovered near zero or fell since March 1998, when an increase in the country's sales tax pushed gains to 1.8 percent.
Food accounted for a third of the increase in core prices last month, and energy contributed more than half. Excluding food and energy, prices rose 0.1 percent, the first increase since August 1998.
Kagome Co. said this week it will raise prices of vegetable and fruit drinks to reflect higher costs of ingredients and packaging materials.
Bank of Japan board members ``are unlikely to underestimate a rising trend in inflation,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong. Should financial markets stabilize and the U.S. recession remain contained, ``we do expect the BOJ to try and squeeze in one more rate hike before year-end and resume monetary tightening more forcefully next year.''
Stagnant Wages
Inflation may be contained because stagnant wages have made households reluctant to pay more for goods and services. Wages fell at the fastest pace in three years in 2007.
The Bank of Japan ``seems reasonably relaxed about the inflation numbers because there's no sign it's feeding into wages demand and creating an inflationary spiral,'' said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. The bank ``isn't going to be doing anything for the remainder of this year.''
Core prices climbed 0.3 percent in the year ended March 31, the government said, the quickest rate in a decade. Bank of Japan policy makers consider consumer prices to be stable in a range between zero and 2 percent.
Tokyo's core prices, a harbinger of the nationwide index, rose 0.7 percent in April from a year earlier, following a 0.6 percent gain in March. Inflation in the capital accelerated even after the expiry of a gasoline tax made the fuel cheaper.
The government will reinstate the tax on May 1, the Yomiuri newspaper reported today, citing a government official it didn't identify by name.
