Japan June inflation stalls as household spending falls

TOKYO (REUTERS) - Japan's annual core consumer inflation stalled and household spending unexpectedly fell in June, underscoring the challenges the central bank faces in reflating the economy to meet its ambitious 2 per cent price target.

Friday's soft indicators reinforce views the economy probably slowed sharply in April-June from the prior quarter, with some analysts expecting to see a contraction when the GDP data is published on August 17.

For now, the Bank of Japan is expected to hold off on expanding monetary stimulus as policymakers have repeatedly said they will look through the effect of last year's oil rout that is mainly behind the slowdown in inflation.

"The BOJ is pinning its hopes on a strong rebound in demand, which would create capacity shortages and stoke price pressures. Unfortunately, today's data on consumer spending underline that these hopes are unlikely to materialise," said Marcel Thieliant, Japan Economist at Capital Economics.

Annual core consumer inflation, which includes oil products but excludes volatile fresh food prices, rose 0.1 per cent in June, government data showed on Friday, slightly exceeding market expectations of no change.

Core consumer prices in Tokyo, a leading indicator of nationwide inflation, fell 0.1 per cent in July, the first annual decline since April 2013.

Household spending fell 2.0 per cent in the year to June after rising 4.8 per cent in the previous month, as rainy weather deterred shoppers. It compared with a median market forecast for a 1.7 per cent increase.

The government maintained its assessment that consumption was recovering moderately as a trend, saying that June's weakness was largely due to temporary factors like bad weather.

Many analysts agree with the BOJ's view that growth will rebound in the third quarter as steady rises in wages lift consumption. But there is uncertainty on how strong the pick-up will be given soft global demand, particularly in Asia, that is weighing on exports and factory output.

The BOJ says it expects consumer inflation to remain flat or slightly negative until around September, but to accelerate from there as the effects of last year's oil price falls dissipate.