By Sumio Ito and Leika Kihara
TOKYO (Reuters) - Japanese household spending fell less than expected in July and the jobless rate hit a two-decade low, offering some hope for policymakers battling to pull the world's third-largest economy out of stagnation.
But with the economy barely growing and inflation sliding further away from the Bank of Japan's 2 percent target, a majority of economists expect the bank to ease further next month, when it conducts a comprehensive review of the effects of its existing stimulus program.
Household spending fell 0.5 percent in July from a year earlier, less than a median market forecast for a 0.9 percent drop and much smaller than a 2.3 percent decline in June, data from the Internal Affairs Ministry showed on Tuesday.
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Separate data showed retail sales slid 0.2 percent in July from a year earlier, less than a median market forecast for a 0.9 percent drop.
The jobless rate fell to 3.0 percent in July from 3.1 percent in June, hitting the lowest rate in more than 21 years and hovering near levels considered to be full employment.
"Consumption is showing signs of a pickup, though it's too early to judge whether the trend has changed," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"While today's data may encouraging for the BOJ, that doesn't necessarily mean it can stand pat as inflation remains weak," he said.
Japan's economy 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.
Consumption has stagnated even as a shrinking working-age population and gradual improvements in the economy led to a tightening job market, as companies remain wary of boosting wages for permanent workers for fear of irreversibly increasing fixed costs.
That reluctance has proved a hindrance for policymakers struggling to end two decades of deflation with aggressive monetary and fiscal stimulus measures, hoping these policies would spur expectations of future inflation and prompt households to spend more now rather than save.
Despite three years of heavy money printing by the BOJ, soft household spending and a strong yen pushing down import costs have kept inflation distant from the bank's 2 percent target.
Core 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 BOJ under pressure to expand an already massive stimulus program.
(Additional reporting by Izumi Nakagawa, Editing by Chang-Ran Kim; Editing by Shri Navaratnam and Eric Meijer)