Japan core consumer inflation grinds to halt, keeps Bank of Japan pressured

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TOKYO (Reuters) - Japan's annual core consumer inflation ground to a halt in February when excluding the effect of last year's tax hike, the first time it has stopped rising in nearly two years, keeping the central bank under pressure to expand monetary stimulus further.

Household spending slumped even as job markets continued to improve, underscoring the challenges premier Shinzo Abe faces in steering the economy toward a solid, sustainable recovery.

While the Bank of Japan has stressed that it will look through the effect of slumping oil prices, the soft inflation data will keep it under pressure to expand monetary stimulus to jump-start price growth toward its 2 percent target.

Stripping out the effect of last year's sales tax hike, the core consumer price index was flat from a year ago, moving further away from the central bank's price goal. The last time core CPI did not rise was in May 2013, when it was flat.

The headline core CPI, which includes oil but excludes volatile fresh food prices, rose 2.0 percent in the year to February, falling short of a median market forecast for a 2.1 percent rise, data by the Internal Affairs ministry showed.

The seventh straight month of slowdown was largely due to continued falls in fuel costs, which will likely keep inflation roughly around zero at least until the middle of this year, analysts say.

The cooling in inflation, if it persists, will hamper BOJ Governor Haruhiko Kuroda's battle to eradicate the deflationary mindset that had led to nearly two decades of stagnation.

Adding to the gloom for the world's third-largest economy, household spending fell 2.9 percent in the year to February to mark the eleventh straight month of declines.

Policymakers expect the slowdown in inflation, including the falling cost of gasoline, and rising wages to boost household spending in coming months and support a fragile recovery.

But the weakness in consumption may drag on growth more than expected if small companies do not follow the footsteps of big manufacturers in raising base pay, analysts say.

In a glimmer of hope, job markets continued to tighten with the unemployment rate falling to ~ percent in February from 3.6 percent in January.

Japan's economy emerged from last year's mild recession as exports and factory output rebounded, although the recovery remains fragile given sluggish household spending.

(Editing by Shri Navaratnam)

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