Subdued Japan inflation, weak demand keep BOJ under pressure

By Leika Kihara

TOKYO (Reuters) - Japan's core consumer inflation edged up in March but weak demand is keeping firms from raising prices, a perennial problem in the world's third-biggest economy as it struggles to shake off years of deflation despite Tokyo's radical stimulus drive.

A slowdown in China and weak first-quarter growth figures in the United States, major markets for Japanese exports, are also adding to the pressure on the Bank of Japan to do more to hit its ambitious 2 percent inflation goal.

"Consumption was unexpectedly weak in the first quarter. Conditions are in place for a rebound but it's still uncertain whether households will actually ramp up spending," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.

Friday's data showing a modest pick up in household spending will be welcome news for the BOJ, which kept policy steady on Thursday and clung to its view that inflation will accelerate next year as rising wages spur consumer spending.

But inflation data for Tokyo, available a month before nationwide figures, showed prices barely rose in April even discounting more stable oil prices, underscoring the patchy success of the BOJ's massive stimulus programme aimed at pulling Japan out of 15 years of deflation.

Many analysts expect economic growth to have slowed well below 1 percent in January-March, from 1.5 percent in the previous quarter, underlining the fragility of the recovery after the economy last year suffered its worst slump since the 2009 financial crisis.

TOKYO CPI GLOOM

Stripping out the effect of last year's sales tax hike, the nationwide core consumer price index (CPI) - excluding volatile fresh food but including oil products - rose an annual 0.2 percent in March, data from the Internal Affairs ministry showed on Friday.

That followed flat growth in February, which was the first time consumer inflation stopped rising in nearly two years.

The BOJ has said it will look through the effect of low oil prices, which will keep inflation flat for most of this year. It hopes inflation will jump sharply toward its 2 percent target next year backed by a solid economic recovery.

But the flat annual Tokyo core-core CPI reading for last month is bad news for the BOJ, particularly because many firms planning to raise prices tend to do so in April, the start of Japan's business year.

"The Tokyo figures are pretty gloomy and suggest that trend inflation may not be as strong as the BOJ argues," Shinke said.

WAGE GROWTH SUBDUED

Including the effect of the tax hike, core CPI rose 2.2 percent, roughly in line with a median market forecast for a 2.1 percent increase.

Japan is emerging from recession but at a snail's pace, as companies remain wary of ramping up spending despite record profits and consumers keep their purse strings tight.

In a glimmer of hope, the jobless rate slid and household spending rose 2.4 percent in March from February, but wages were almost flat in March as small firms resist government pressure to substantially raise pay as they struggle to pass on costs.

Japanese manufacturing activity also contracted in April for the first time in almost a year, adding to fears that the economy is struggling to gain traction.

(Reporting by Leika Kihara; Editing by Shri Navaratnam)