Japan's wholesale prices growth slowest in 2 years

TOKYO, Oct 12 (Reuters) Japanese wholesale prices rose at their slowest annual pace in more than two years, September data showed, raising fresh doubts about central bank predictions that consumer inflation will return soon.

Smaller increases in crude oil and nonferrous metal prices held back wholesale prices over the past year and companies still faced a competitive squeeze, with the cost of raw materials rising much faster than their selling prices.

The data did little to alter the prevalent market view the Bank of Japan (BOJ) will wait a few more months before increasing rates, with some saying it raised questions about whether Japan really was winning its battle with deflation.

The yen and Japanese government bonds largely ignored the data as markets saw no change to the central bank's view that it would hold back rates while it waits to see if U.S. subprime woes derail growth in Japan.

Economists said the tame inflation gave the central bank fewer reasons anyway to push forward on its plan to raise rates to more normal levels from the current 0.5 percent -- the lowest in the industrialised world.

''Rising pressures on prices have hardly been seen in goods as well as wages, and that will send an additional headwind to the BOJ's rate hike policy,'' said Yasunari Ueno, chief market economist at Mizuho Securities.

The corporate goods price index (CGPI), which tracks wholesale prices, rose 1.7 percent in September from a year earlier, below market forecasts for a 1.8 percent gain.

Wholesale prices have been growing for more than 3-{ years, but the pace of growth has slowed for the past three months and it was the lowest annual increase since July 2005.

PRICE SQUEEZE The BOJ, fearing cheap money will eventually cause the economy to overheat, wants to gradually raise interest rates, but with consumer prices still showing mild deflation and the U.S.

economy soft, it has left them alone since February.

The central bank said on Thursday that wholesale prices were likely to keep increasing for the time being, but it acknowledged the pace was expected to slow -- making it less likely that rising consumer prices will return in the near future.

Small firms, in particular, have faced stiff competition and been unable to pass on higher wholesale inflation to their customers.

While raw material costs, excluding imports, in September were 5.8 percent higher than a year ago, the final prices companies charged customers for domestically made goods fell 0.2 percent -- the weakest result for six months.

''This casts some uncertainty regarding the outlook for when consumer prices may escape from negative territory,'' said Junko Nishioka, an economist at ABN AMRO.

Speaking on Thursday after his central bank again left rates unchanged, BOJ Governor Toshihiko Fukui maintained that annual consumer prices, which have been falling since February, would pick up soon.

In a further sign of weakness in Japan's economy, a government survey on Friday showed Japanese consumer confidence hit a three-year low in September, in seasonally adjusted terms.

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