ANALYSIS-Squeezed small firms a threat to Japan economy

By Yuzo Saeki

TOKYO, April 29 (Reuters) - Japan's small firms are near the end of their tether, squeezed between rapid rises in raw material costs and customers unwilling to pay more, deepening concern about the economy as big exporters face slowing global demand.

While Japan's giants like Toyota (7203.T), with their strong brands, have boosted exports and kept Japan growing, it is the many small businesses around them that employ most workers.

The government acknowledges growth is stalling and the fear is that, if exports slow off the back of a U.S. downturn, weakness in wage growth because struggling small firms can't boost salaries will see Japan dip into recession.

"Headwinds against the corporate sector warrant attention as they may lead to further deterioration in wages and put a cap on consumption," said Kentaro Mukai, an economist at the Cabinet Office.

Rising costs are not limited to any one country, but Japanese have lived through a decade of deflation so the customers of the country's small firms shrink away from accepting price increases.

At the same time, small firms face soaring raw materials prices. Oil hit a record peak close to $120 a barrel on Monday CLc1, taking gains to about 80 percent in the past year. Other commodity prices have surged too.

Japan's most closely watched consumer price index rose 1.2 percent in the year through March, a decade high that suggests prices are gradually rising. [ID:nT340313]

But that is still less than a third of the wholesale inflation that businesses face, at 3.9 percent over the same period -- its highest level in 27 years. [ID:nT18478]