Japanese annual wholesale price inflation jumped to 7.1 percent in July, a 27-year high and well above expectations, adding to fears that high energy and commodity costs are squeezing firms and pushing the economy into recession.
The soaring wholesale inflation comes as worries grow that Japan's longest post-war recovery may have ended as exports -- the main engine of growth in the world's No.2 economy -- sputter as the global economy slows.
"In the short term, the rise will hurt corporate profits and cost-push inflation will weigh on the economy for a while as it enters a recession," said Naoki Iizuka, a senior economist at Mizuho Securities.
Iizuka added, however, that wholesale inflation would peak in the July-September quarter given a recent 20 percent slide in oil prices and declines in other commodities, helping to ease the impact of high raw material costs from later this year.
A stock analyst said the high figure contributed to a 0.6 percent fall in the Nikkei 225 Average but market reaction was muted as investors saw little chance of a rate hike by March next year, in the face of a slowing economy.
The 7.1 percent jump in wholesale prices, as measured by the corporate goods price index (CGPI), in July from a year earlier topped a market consensus forecast for a 5.8 percent rise and was the biggest annual jump since January 1981, in the wake of the second oil shock.
Although energy and commodity prices fell sharply in July, they were still higher than a year ago -- hurting Japan, which imports almost all its oil needs and most of its other raw materials.
Government officials say a long period of economic growth since 2002 may have ended and there are growing fears of a recession, at least under a Japanese definition of a downturn in the economic cycle.
Gross domestic product data due out at 8:50 a.m. on Wednesday is expected by economists polled by Reuters to show Japan's economy contracted 0.6 percent in the second quarter.
As towering gasoline and food prices have hurt consumer sentiment, many companies have been unable to fully pass on the rises in costs, hurting their bottom lines.
Final goods prices charged to customers by businesses -- an approximate match for consumer inflation -- rose 1.6 percent in July from a year earlier, showing the pressure companies face as their wholesale costs rise almost four times as fast.
The U.S. economic malaise is also putting a brake on Japanese exports to the United States and shipments to other regions have also shown signs of strain as global growth slows.
The BOJ has said it is more concerned about the downside risks to the economy in the near term and financial markets are expecting the central bank to keep interest rates unchanged for the foreseeable future.
"High energy and food prices are probably pushing annual core inflation well above 2 percent this summer," said Hiroshi Shiraishi, an economist at Lehman Brothers Japan. "But this doesn't mean the Bank of Japan could raise interest rates any time soon, as it worries more about the impact from high costs on the economy rather than the risk of rising inflation."
Money market futures are pricing in virtually no chance of a rate hike in the next 12 months but also no expectation for a rate cut either.