Japanese wholesale price inflation hit a 27-year high in March, squeezing businesses that are unable to pass higher costs for fuel and other raw materials on to consumers worried about wages and the economy.
The rise in costs, only partly reflected so far in consumer price inflation, is also posing problems for the Bank of Japan, which must control inflation but faces pressure to cut interest rates because of the fallout from the global credit crisis.
The 3.9 per cent rise in the corporate goods price index in March from a year earlier is almost four times the most recent core consumer price inflation of 1 per cent in February.
Rising costs could keep companies from raising salaries for workers. That would keep a lid on household spending, which accounts for over half of the world's second-biggest economy.
Consumers used to years of stable prices when the country was going through deflation are complaining that everyday food prices are going up in supermarkets, even if falling costs of electronic goods, for example, hold the consumer price index down.
BOJ Governor Masaaki Shirakawa, in Washington for a G7 meeting, called on the Group of Seven rich nations to show a clear determination to ensure stability in the financial system.
One fear is that rising inflation in Japan will coincide with sluggish exports as the US economy slows under the weight of the US subprime housing problems, potentially tipping Japan into recession.
Prices of domestic final consumer goods, part of the wholesale price data covering goods shipped to retailers, rose 1.4 per cent in March from a year earlier, up from 1.2 per cent in February, the Bank of Japan reported.