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TOKYO (Reuters) - Japan's core consumer prices rose at a slower than expected pace in March and household spending fell more than expected in a worrying sign for the central bank that domestic demand won't be strong enough to generate sustained inflation.
Industrial product in March also fell more that expected, but economists remain optimistic that output will quickly recover in the following month as strength in overseas economies increases export demand.
Stripping away energy costs, consumer prices actually fell for the first time in almost four years, suggesting an exit from the Bank of Japan's radical quantitative easing programme is not imminent.
"I think the BOJ will have to downgrade its consumer price forecasts again later this year," said Hiroaki Muto, economist at Tokai Tokyo Research Center Co.
"Some people in the market are looking for an exit, but the next move could be some form of easing."
Most analysts polled by Reuters before Friday's data expect the BOJ's next policy move to be a tightening of monetary policy, though many do not expect it to happen until next year at the earliest.
The core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 0.2 percent in March and posted the third straight month of increase on rising energy costs, Internal Affairs ministry's data showed on Friday.
This undershot economists' median estimate for a 0.3 percent annual increase.
Inflation has been close to zero for almost two years, posing major policy hurdles for the BOJ's ambitious 2 percent inflation target.
Stripping away the effect of fresh food and energy, consumer prices fell 0.1 percent in March from a year ago due to lower prices for mobile phones, falling for the first time since July 2013.
Separate government data showed on Friday that Japan's jobless rate held steady at 2.8 percent in March and the availability of jobs rose to the highest since November 1990.
However, the tight labour market has so far done little to push up consumer prices, another problem for the BOJ's policy deliberations.
Japanese household spending fell 1.3 percent in March from a year earlier in price-adjusted real terms, much more than the median forecast for a 0.3 percent decline.
"It's clear household spending is weak," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"I think energy prices will continue to rise, but if weakness remains in the prices for non-energy goods, inflation won't accelerate and that's worrying," he added.
Separate data showed industrial production fell 2.1 percent in March, a much bigger fall than the 0.8 percent decline expected, as electronics and car makers trimmed production. But manufacturers expect output to surge by 8.9 percent in April, suggesting the declines in March are temporary.
Japan's long-stagnant economy has shown signs of life in recent months, with exports and factory output benefiting from a rebound in global demand.
On Thursday, the BOJ kept monetary policy unchanged as expected, but offered its most optimistic assessment of the economy in nine years, buoyed by a pick-up in overseas demand.
However, the BOJ also cut its core consumer inflation forecast for the year ending in March 2018, blaming weak services prices and cellphone bill discounts by carriers facing fierce price competition.
Many analysts expect core consumer prices to head toward 1 percent later this year as the base effect of last year's oil price falls dissipates, though this would be largely due to external factors such as energy prices and currency moves, not consumer spending, which remains sluggish.
Reporting by Minami Funakoshi; Editing by Sam Holmes