By Tetsushi Kajimoto

By Tetsushi Kajimoto

TOKYO (Reuters) - Japan's core consumer prices fell in the year to August, a sixth straight month of declines and a daunting challenge for the Bank of Japan's relaunched stimulus campaign.

Household spending fell 4.6 percent year-on-year in the month, considerably exceeding the 2.5 percent drop expected by economists, and highlighting the weakness in private consumption which makes up roughly two-thirds of the economy.

A rebound in factory output brightened the outlook somewhat.


Weak consumption data may mean additional scrutiny of the central bank, which last week switched to targeting short- and long-term interest rates from of its previous target of increasing base money at an annual pace of 80 trillion yen ($789 billion).

It also underscored the need for Prime Minister Shinzo Abe's government to take up the slack by implementing vigorous economic growth plans and structural reforms on top of a 28-trillion yen stimulus package it is set to roll out later this year.

"Output and private consumption are in a gradual pickup, but what's worrying is the slowdown in consumer inflation excluding both food and energy," said Taro Saito, director of economic research at NLI Research Institute.

"If the price trend persists, the BOJ can no longer blame oil prices for weakening inflation and it would be forced into further easing, even though the chance of immediate action is slim."

The 0.5 percent annual decline in the core consumer price index, which includes oil products but excludes volatile fresh food prices, matched the prior month's drop, which was the biggest since March 2013, a month before the central bank embarked on massive monetary stimulus.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, rose 0.2 percent in the year to August, the slowest since September 2013.

Despite 3 1/2 years of heavy money printing by the BOJ, weak household spending and a strong yen weighing on import costs have kept inflation well away from the central bank's 2 percent goal.

Neither has a tight job market helped fuel inflation. Many firms remain wary of boosting wages for fear of raising fixed costs in environment of negligible inflation, in turn dampening households' readiness to spend. The jobless rate stood at 3.1 percent in August, near a 21-year low hit in the prior month.

Separate data from the trade ministry showed factory output rose 1.5 percent in August, much bigger than a 0.5 percent rise expected by economists, led by domestic demand for liquid crystal displays for computers and car navigation systems, officials said.

The economy grew at an annualised rate of 0.7 percent in April-June, slowing sharply from the prior quarter's growth which was led by leap year effects.

($1 = 101.3900 yen)

(Reporting by Tetsushi Kajimoto; Additional reporting by Sumio Ito; Editing by Eric Meijer)

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