TOKYO (Reuters) - Japan's core consumer prices rose 0.3 percent in April from a year earlier to mark a fourth straight month of increases, offering policymakers some hope a steady economic recovery will convince consumers to start spending again. But the increase was due largely to the fading effect of last year's energy price falls, underscoring the challenges the Bank of Japan still faces after years of heavy monetary stimulus to reach its ambitious 2 percent inflation target.
When stripping away the effect of volatile fresh food and energy costs, consumer prices were unchanged in April from a year ago in a sign many companies remain wary of hiking prices for fear of scaring away cost-sensitive households.
"Retailers are struggling to raise prices because wages and household income aren't increasing much. They thus try to trim costs by keeping wages low," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"The positive economic cycle isn't kicking in yet," he said, adding that the BOJ will likely maintain its ultra-loose monetary policy for the time being.
With the economy showing signs of life, many analysts now expect the BOJ's next move to be a reduction - rather than an expansion - of its monetary stimulus.
But BOJ officials have stressed that any reduction in stimulus would be some time away, pointing to the fact inflation remains distant from their target.
The rise in the core consumer price index (CPI), which includes oil products but excludes fresh food prices, followed a 0.2 percent increase in March, data from the Internal Affairs Ministry showed on Friday. It was smaller than a median market forecast for a 0.4 percent gain.
Core consumer prices in Tokyo, available a month before the nationwide data, rose 0.1 percent in May from a year earlier against flat growth projected by analysts in a Reuters poll.
It was the first annual increase in the index since December 2015, thanks to the boost from rising energy prices.
"The main inflation gauges all edged up in April and should climb a bit further in coming months," said Marcel Thieliant, senior Japan economist at Capital Economics.
"But with the boost from higher energy prices set to fizzle out in the second half of the year, inflation will settle at levels well below the BOJ's 2 percent target."
Thieliant added that the prices of imported consumer goods had fallen by an annual 2.43 percent in April, so even if the yen weakened to 120 versus the dollar import prices would not be severely affected.
"The upshot is that headline inflation is unlikely to rise much further from now on," he said.
Japan's economy grew in the first quarter at its fastest pace in a year to mark the longest period of expansion in a decade, thanks to robust exports and a helpful boost from private consumption.
Nonetheless, weak household spending and poor corporate pricing power have kept inflation around zero for almost two years, forcing the BOJ to revamp its policy framework to one better suited for a long-term battle against deflation.
Reporting by Leika Kihara; Editing by Eric Meijer