Slowing Japan inflation keeps BOJ under pressure but factory output rebounds

TOKYO (Reuters) - Japan's core consumer inflation slowed for a fifth straight month in December hit by collapsing oil prices, keeping the central bank under pressure to meet its ambitious 2 per cent inflation target.

But factory output rose 1.0 per cent in December helped by a much-awaited rebound in exports and manufacturers expect to increase production in January, boding well for an economy emerging from recession.

The pick-up in output backs up the Bank of Japan's argument that a solid economic recovery will help accelerate inflation toward its target early next year, although oil price falls will continue to weigh on inflation in the short run.

Excluding the effect of a sales tax hike in April last year, core consumer price index (CPI) - which excludes volatile fresh food but includes oil products - stood at 0.5 per cent, just a quarter of the way in achieving the BOJ's 2 per cent target.

The headline core consumer inflation rose 2.5 per cent in the year to December, government data showed on Friday. That was less than a median market forecast of a 2.6 per cent increase.

The increase in December output compared with a median market forecast for a 1.3 per cent gain. Manufacturers surveyed by the government expect output to rise 6.3 percent in January but fall 1.8 per cent in February, the data showed.

The government raised its assessment on output to say it is "picking up moderately." In the previous month, it said output was flat.

Japan's economy slipped into recession in the third quarter of last year as exports failed to pick up and last April's sales tax hike cooled consumer spending.

Analysts expect the economy to have expanded an annualised 3.2 per cent in October-December as the tax-hike pain subsides, a Reuters poll showed.

In a sign the recovery will be fragile, however, household spending fell 3.4 per cent in the year to December, separate data showed on Friday, more than a median market forecast.