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The Bank of Japan is watching the effect of higher commodity prices on global inflation and growth in the world's second-largest economy, meeting minutes show.

Japan faces “considerable downside risks including uncertainty regarding future developments in overseas economies and global financial markets,'' members agreed at their May 19- 20 meeting, according to the minutes released today in Tokyo. “Inflation risks had been heightening worldwide given the high international commodity prices.''

Bonds rose on speculation the central bank will hold off raising the benchmark interest rate from 0.5 percent this year as growth stagnates. Governor Masaaki Shirakawa said last week that his board needs to examine whether rising oil and raw- material prices will force companies and consumers to spend less.

“The Bank of Japan's message is that they're watching the upside risks for prices and downside risks for growth and the latter will prevail for the time being,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “There will be little chance for the bank to raise rates at least during the current fiscal year'' ending March 2009.

The yield on Japan's 10-year bond fell 6 basis points to 1.77 percent, the lowest since June 10, as of 12:33 p.m. in Tokyo. The yen traded at 107.96 per dollar from 107.93 before the minutes, and has weakened 2.3 percent this month.

Companies, Households

Rising commodities costs pushed wholesale-price inflation to 4.7 percent in May, the steepest rate in 27 years. Some companies have transferred those costs to households, causing consumer prices to climb the most in a decade.

The seven board members agreed growth will probably keep cooling because of the increase in raw-materials prices. Shirakawa, after his board kept rates on hold on June 13, said costlier commodities exacerbate the “downside risks for domestic demand'' as well as fan people's inflation expectations.

“As long as these uncertainties do not recede, these downside risks to growth keep the upside risks to inflation in check and prevent the BOJ from actually resuming its tightening steps,'' said Jan Lambregts, head of Asia research at Rabobank International in Hong Kong.

The central bank has kept the benchmark rate at 0.5 percent since doubling it in February 2007. The policy board last week cut its evaluation of exports and profits as the global slowdown crimps demand and surging costs squeeze margins advance america cash advance online payday advance.

G-8's Concern

Finance ministers from the Group of Eight nations meeting in Osaka last week singled out spiraling food and fuel prices as their chief concern for the global economy. “Elevated commodity prices, especially of oil and food, pose a serious challenge,'' they said in a statement on June 14.

Inflation is accelerating worldwide and the price of oil reached an unprecedented $139.89 a barrel on June 16. Japan's core consumer prices, which exclude fresh food, climbed 0.9 percent in April from a year earlier after rising 1.2 percent in March, the fastest pace since 1998.

A report due June 27 will probably show that core prices increased around 1.5 percent in May after a gasoline tax was reinstalled in the month, according to Mari Iwashita, chief market economist at Daiwa Securities SMBC Co.

Some members highlighted the need to examine households' expectations that prices will keep climbing.

“Attention should be paid to the effects of the ongoing rise in the prices of daily necessities on consumers' inflation expectations and firms' price-setting behavior,'' they said.

Some 87.1 percent of households predict prices will rise over the next 12 months, the most on record, a Cabinet Office survey showed last week.

Within Range

Even at a decade high, Japan's inflation remains within the bank's zero to 2 percent definition of price stability and is lower than in the U.S. and Europe. Core prices in the U.S. rose 2.3 percent in May from a year earlier and European inflation surged 3.7 percent in the month, the fastest pace in 16 years.

Rising oil and commodities prices support Japan's exports to resource-rich economies as well as increase the cost of imports, some members said. Both factors need to be considered when assessing the effect of raw-materials prices on the economy, they said. Japan relies on imports for virtually all of its oil.

Many members said keeping rates low for a long time could cause economic swings, according to minutes of the April 30 meeting, also released today. The bank dropped its two-year call for raising rates in its semi-annual outlook published that day.

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