By Leika Kihara

TOKYO (Reuters) - Japan's consumer prices fell in July by the most in more than three years as more firms delayed price hikes due to weak consumption, keeping the central bank under pressure to expand an already massive stimulus program.

The gloomy data reinforces a dominant market view that premier Shinzo Abe's stimulus program have failed to dislodge the deflationary mindset prevailing among businesses and consumers.

The nationwide core consumer price index, which excludes volatile fresh food prices but includes oil products, fell 0.5 percent in July from a year earlier, the fifth straight month of declines, data showed on Friday. It exceeded a median forecast for a 0.4 percent decline and June's 0.4 percent drop.

While falling energy costs were mainly behind the slide in consumer prices, rises in imported food prices and hotel room rates moderated in a sign that weak consumption is discouraging firms from passing on rising costs.

A strong yen also pushed down import costs, offering few justifications for retailers to raise prices of their goods.

"While economic activity is on the mend, the slump in import prices suggests that underlying inflation will continue to fall in coming months," said Marcel Thieliant, senior Japan economist at Capital Economics.

"The Bank of Japan will find it increasingly difficult to blame falling energy prices for the decline in overall consumer prices."

Underscoring Japan's sticky deflationary mindset, the ratio of goods and services making up CPI that saw prices rise from a year earlier fell to 60.2 percent in July from 62.3 percent in June.

Saori Ito, a 34-year-old mother who works at a cosmetics company, said she buys a week's worth of groceries together over the weekend so she buys only what she needs.

"I try to absolutely scrap unnecessary spending. That's my stance on buying clothes too," she said.


Despite three years of heavy money printing by the BOJ, weak household spending and a strong yen pushing down import costs have kept inflation distant from the bank's 2 percent target.

A majority of economists expect the BOJ to ease further next month, when it conducts a comprehensive review of the effects of its existing stimulus program.

A separate indicator compiled by the BOJ that strips away the effect of both energy and fresh food costs showed consumer prices rose 0.5 percent in the year to July, slower than a 0.7 percent annual increase in the previous month.

Markets are focusing on how the BOJ's assessment next month of its stimulus program, which combines negative interest rates with a huge asset buying, could affect the direction of monetary policy.

"Given how prices are behaving and how the BOJ is asked to cooperate with Abe to beat deflation, it's very hard to think the BOJ will unwind stimulus any time soon," said Takeshi Minami, chief economist at Norinchukin Research Institute.

"Instead, the September analysis will probably lay the grounds for a deepening of negative interest rates."

Japan's economic growth ground to a halt in April-June and analysts expect any rebound in the current quarter to be modest as weak global growth and the yen's 20 percent rise against the dollar this year hurt exports and capital expenditure.

Analysts expect consumer prices to pick up in or around early next year as the downward pressure from energy costs wanes, though any rebound may be tempered by soft consumption and a strong yen pressing down on the cost of imports.

Starting from this release, the government changed the base year for the price indices to 2015 and changed the components making up the indices to better reflect consumer spending trends, in an overhaul it conducts once every five years.

(Additional reporting by Kaori Kaneko, Minami Funakoshi and Stanley White; Editing by Eric Meijer and Richard Borsuk)