Japan wholesale prices rise, deflation waning

TOKYO, Apr 13 (Reuters) Japan's wholesale prices rose in March from a year earlier as high oil and raw material costs were passed on to prices of final goods, providing further evidence that the economy is emerging from years of debilitating price deflation.

The domestic corporate goods price index (CGPI), which tracks trends in wholesale prices, rose 2.7 percent in March from the same month a year earlier, Bank of Japan (BOJ) data showed on Thursday.

That was slightly below a consensus forecast of a 2.8 percent rise.

But the pace of rises has been accelerating over the past several months and revised data for February showed the CGPI rose 3.0 percent from a year ago, the highest gain since a 3.1 percent increase in January 1990.

''Basically, there seems to be little change in the trend,'' said Chotaro Morita, chief bond strategist at Deutsche Securities.

''Commodity prices other than oil have risen quite a bit and that seems to be continuing. The impact on final goods prices is not entirely clear yet, and a lot depends on that.'' Compared with a month earlier, the CGPI was unchanged in March, lower than the median forecast for a 0.2 percent gain.

The price of final goods rose 0.9 percent from the same month a year earlier and have now risen year-on-year each month since November after over seven years of declines.

RISES PASSED ON High oil and raw material prices have been pushing up Japan's wholesale prices, and companies -- encouraged by a solid economic recovery -- have been passing on the rises to consumers over the past several months.

Such a move has underpinned modest rises in consumer prices, which prompted the Bank of Japan (BOJ) to scrap its five-year-old ultra-easy policy last month.

''While manufacturers have been able to offset higher raw material costs with improvements in productivity, the service sector will have to raise prices at the consumer level to make up for those costs,'' said Takeshi Minami, chief economist at Norinchukin Research Institute.

Financial markets were unmoved by the data.

Deflation, or sustained declines in prices, plagued the world's second-largest economy for more than seven years, hurting consumption as shoppers waited for cheaper prices, dampening corporate profits and exacerbating firms' debt burdens.

But with consumer prices finally picking up over the past several months, the government hopes that Prime Minister Junichiro Koizumi could declare victory over deflation before his term ends in September.

Some traders speculate that the BOJ could start raising interest rates as early as July, partly because they believe it would be easier for the central bank to make such a politically sensitive move around the same time as the government declares the end of deflation.

The BOJ's policy-setting board unanimously decided to keep the key short-term interest rate unchanged at virtually zero on Tuesday, but financial markets remain on edge over the timing of what would be the first rate hike in six years.

REUTERS PV BS1132