Japanese prices rise at record pace

Consumer prices in Japan rose last month at their fastest pace in nearly a decade, but Bank of Japan Governor Toshihiko Fukui pledged to parliament to maintain a loose monetary policy.

Consumer prices shot up at twice November's pace on the back of higher oil and other commodity prices rather than strong demand. Core consumer prices, excluding food, rose 0.8 per cent from a year earlier, the Statistics Bureau said.

Fuel costs jumped 3.6 per cent from December 2006. Omitting food and energy costs, consumer prices dropped 0.1 per cent last month, the same rate as November.

The uncertain international environment resulting from the subprime debacle combined with lacklustre Japanese domestic growth makes it difficult for the BoJ to raise interest rates from the current 0.5 per cent level. Despite the rise in inflation, markets are pricing in a higher chance that Japan will cut rates than raise them.

"In Japan, the underlying economy is slowing while a rise in the consumer price index is accelerating. But looking ahead, the economy will likely expand moderately under stable prices towards next fiscal year," Mr Fukui told a parliamentary committee Friday. "Based on such judgment, we firmly believe that we can continue to realise stable economic growth by providing the current accommodative monetary conditions for a while."

He added that recent stock market declines could also reduce consumption. The BoJ left rates unchanged when it finished meeting Tuesday. The central bank said then that it expected growth in the world's second-largest economy to be slower than its previous 1.8 per cent forecast for the year ending March 31 due in part to the sharp slowdown in housing investment after more stringent earthquake regulations were implemented last year.

Japanese consumers are facing rising daily costs without the benefit of higher wages to offset them, leaving many households reluctant to spend. Surveys show consumer confidence is fading, with the public expecting prices to increase over the next year. Families also face uncertainty over future pension payouts, which may also be eroding a will to spend.