TOKYO • Japan's core consumer prices rose 0.5 per cent last month from a year earlier to mark a seventh straight gaining month, a sign the economy is making steady but painfully slow progress towards meeting the central bank's 2 per cent inflation target.

The increase was largely driven by higher fuel bills as subdued wage growth discouraged consumers from increasing their spending, underscoring the challenge the Bank of Japan faces in achieving its ambitious price goal.

The rise in the nationwide core consumer price index, which includes oil products but excludes volatile fresh food prices, matched a median market forecast and followed a 0.4 per cent gain in June.

"Inflationary pressure isn't building up as companies remain extremely cautious over raising prices. The boost from energy costs will peak around October, so consumer inflation may slow after that," said Dai-ichi Life Research Institute chief economist Yoshiki Shinke. "The BOJ (Bank of Japan) will likely be forced to cut its price forecasts again, so it would be hard to justify raising interest rates even as economic growth gathers momentum."

Core consumer prices in Tokyo, released before the nationwide data, were up 0.4 per cent this month from a year earlier, against a 0.3 per cent gain projected in a Reuters poll. "The slow grinding rise in Tokyo inflation... is encouraging," ING said in a research note, adding the 2 per cent inflation target "remains, as it always was, a hugely over-optimistic and not very credible goal".

Japan's economy expanded at the fastest pace in more than two years in the second quarter as consumer and company spending picked up.

But price and wage growth remain stubbornly weak with firms still wary of passing on profits to employees, raising doubts over whether the second quarter's bounce can be sustained.

REUTERS