Japan's price decline slowing - Price deflation continues to bedevil the Japanese economy.

edition.cnn.com Thursday, March 13, 2003 Posted: 0626 GMT ( 2:26 PM HKT)

TOKYO, Tokyo (Reuters) -- Japan's corporate goods price index (CGPI), a measure of companies' costs, showed Thursday that wholesale prices declined at their slowest rate in two years in February.

The domestic CGPI, a revamped version of the wholesale price index, was down 0.9 percent from February 2002 and up a preliminary 0.2 percent from January, the Bank of Japan said on Thursday.

Analysts had forecast on average a year-on-year fall of 1.0 percent and a month-on-month rise of 0.1 percent.

"The main reason is the rise in oil prices," a BOJ official told a briefing. He added that a rise in the cost of other raw materials had also helped the slowdown in the year-on-year fall.

Japan's manufacturers are entirely dependent on imports for oil supplies. Recent tension in Iraq and a strike in Venezuela have pushed oil prices up about 11 percent in the past two months.

Commodity prices worldwide have also risen about seven percent this year, having knock-on effects on costs at Japanese companies ranging from food processors to metals firms.

Though the rate of decline in Japan's wholesale prices slowed, Thursday's figures show that deflation still reigns in the world's second-largest economy.

"There has been some hope that higher raw material prices could lead to inflation at home," said Seiji Adachi, economist at Credit Suisse First Boston.

"But with domestic demand poor and the supply-demand gap getting bigger, companies will struggle to pass on the rises to their selling prices."

The government has identified falling domestic prices as the top problem facing the economy.

Now into its fourth year, deflation is crimping profits at manufacturers and means that bad loans at Japan's banks are getting bigger almost as fast as the banks are managing to reduce them.

The government has called on the Bank of Japan to take new measures to help in the fight against deflation, increasing the pressure on incoming governor Toshihiko Fukui, whose appointment was approved by Japan's lower house of parliament on Thursday.