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Japan: Crude oil prices bode ill for economy

Some analysts fear that sustained high prices could trigger a recession.

As crude oil prices soar to their highest levels ever, costs of related products and services such as petrochemical products and international airfare are being yanked up along with them, threatening economic growth.

The rise in prices of crude oil and other raw materials is starting to suppress corporate profits. Higher costs are expected to filter from wholesale to retail prices and then on to consumers in some cases.

PS Japan Corp., the nation's largest producer of polystyrene, used to make plastic cups for instant noodles and other products, plans to raise the price of the material by 25 yen per kilogram from September. The hike is due to rising prices of raw materials such as naphtha, a derivative of crude oil.

The hike in the price of polystyrene would be the third this year, following those in March and July. Even with the hikes, however, the firm has yet to sufficiently absorb the surge in raw material prices, and is now losing money on its polystyrene sales. As a result, the company cut production by 15 to 20 percent this month.

The glass industry is also feeling the pinch of higher crude oil prices as manufacturers use heavy oil for melting sand. Asahi Glass Co. raised the price of plate glass by 8 to 10 percent this month. Nippon Sheet Glass Co. says it will increase the price of plate glass by 10 percent next month.

The rise in plate-glass prices will also affect the cost of producing automobiles and the cost of construction materials.

Many firms find it difficult to pass the increases on to end users but some say they can no longer afford to absorb them.

Japan Airlines Corp. raised its standard international airfare by 5 percent in July because its fuel costs increased by 10 percent year on year in the April-June quarter. Should fuel prices stay at roughly the same level for the rest of the fiscal year, the airline expects to post a loss of 30 billion yen at book-closing in March, officials said. The July fare hike will save the company only about 9 billion yen, the officials added.

Late last month, regional electric power firms, Osaka Gas Co. and Fukuoka-based Saibu Gas Co. said they will raise electricity and gas-utility fees by about 1 percent for the October-December period, the result of a system that passes the price movements of raw materials on to consumers.

At a national average of 114 yen per liter including taxes, gasoline prices have climbed to their highest levels in the past eight and a half years. Oil refiners refrained from raising wholesale price in July and August, but an official at an oil refiner said: ``The companies have no other choice but to raise them in September by around 2 yen per liter if the current price of oil persists.''

The benchmark West Texas Intermediate (WTI) crude oil price at the New York Mercantile Exchange this week exceeded the previous high, rising above $44 (4,840 yen) per barrel.

Dai-ichi Life Research Institute Inc. estimates that if WTI crude stays around $40 per barrel, it will result in a 0.18 percentage point drop in the real growth rate of Japan's GDP this fiscal year.

``If crude oil prices reach $50 a barrel, Japan will likely fall into recession due to a drop in exports stemming from a slowing world economy,'' said Dai-ichi Life Research Institute economist Yoshikiyo Shimamine.(IHT/Asahi: August 7,2004) (08/07)

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