Japan inflation speeds up slightly in June, keeps Bank of Japan goal elusive

By Leika Kihara

TOKYO (Reuters) - Japan's annual core consumer inflation quickened slightly in June, offering some relief for central bank policymakers struggling to find out why a prolonged economic recovery has failed to drive up growth in wages and prices.

But that relief may be short-lived because the increase was due largely to recent gains in oil costs with the prices of other goods barely picking up, underscoring the challenge the Bank of Japan faces in hitting its elusive 2 percent target.

The nationwide core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, rose 0.8 percent in June from a year earlier, matching a median market forecast. It followed a 0.7 percent increase in May.

The so-called core-core inflation index, a more closely watched gauge the BOJ uses to strip away the effect of energy and fresh food costs, was up 0.2 percent in June, government data showed on Friday. That was a slowdown from the previous month's 0.3 percent gain.

The data will be closely scrutinised when the BOJ board meets for a rate review on July 30-31 and conducts a quarterly review of its long-term projections.

Core consumer inflation slowed for three straight months in April before flattening in May, prompting calls from BOJ officials to conduct a thorough analysis at the July rate review on why inflation remains stubbornly low despite solid growth.

A rebound in nationwide CPI was widely expected after data showing annual core consumer inflation in Tokyo - a leading indicator of nationwide figures - accelerated to 0.7 percent in June from 0.5 percent in May.

At the meeting, the BOJ may concede that inflation could fall short of its target for as long as three more years, sources say, in what would the strongest sign yet of acceptance that its goal cannot be reached quickly.

That would tally with a Reuters poll out on Friday that found more than 40 percent of Japanese businesses believe it will take more than three years to reach the central bank's inflation goal of 2 percent and more than a quarter think the goal is an impossible objective.

(Reporting by Leika Kihara; Editing by Eric Meijer)