* Nationwide May core CPI up 0.1 pct vs f'cast flat growth * May household spending up 4.8 pct yr/yr vs f'cast +3.4 pct * Jobless rate at 18-year low but wage growth slow * Rising food costs complicate BOJ's policy outlook (Adds context on policy challenges, quote from retailer and more comments from analysts) By Leika Kihara TOKYO, June 26 Japan's household spending rose in May for the first time in more than a year, and a robust jobs market fueled hopes that companies will begin lifting wages needed to spark inflation towards the central bank's ambitious 2 percent goal. The rebound offers some relief to the Bank of Japan, which has worried about the slow pick-up in consumption after last year's sales tax hike pinched household budgets. But a steady rise in food prices, driven mostly by higher import costs from a weak yen, underscores a dilemma the central bank faces as it tries to accelerate demand-side inflation without scaring consumers away from shopping. Core consumer inflation rose just 0.1 percent in the year to May as the effect of last year's oil rout lingered, highlighting how far the BOJ is from hitting its price target. "Consumption is recovering but the momentum isn't strong," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute. "Rising prices are good news for the BOJ in terms of achieving its price target. But if they aren't driven by strong demand and mostly for food prices, that may hit consumption." Household spending rose 4.8 percent in May from a year earlier, data showed on Friday, exceeding market forecasts and marking the first increase since March last year. The unemployment rate was steady at a 18-year low of 3.3 percent and job availability hit a two-decade high, laying the grounds for companies to raise wages and deliver a sustained recovery in consumption. CAUTIOUS OPTIMISM Retailers are cautiously optimistic. Beverage maker Suntory's new premium beer sold double the company's estimate in the three months to May, while department stores like Isetan Mitsukoshi are seeing middle-income consumers buy more luxury watches. "We're somewhat more confident about consumption," Yoji Naka, head of Isetan Mitsukoshi's outlet in the central Tokyo district of Nihonbashi told Reuters recently. "Spending (by middle-income consumers) probably hit bottom and is regaining momentum." But analysts warn that pay rises have been too modest to make up for steadily rising living costs. A close look at the price data showed food prices, excluding those for volatile fresh food items, rose 1.6 percent in the year to May. More than 60 percent of food items making up the inflation index saw prices rise, with consumers having to pay more for goods ranging from chocolate bars to whisky. "Rises in wages are limited and there are worries about the outlook for the economy. If wages stay unchanged and prices are to rise going ahead, people won't spend much," said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance. The BOJ hopes wage rises will broaden and boost consumption, making up for soft exports dragging on growth. Many policymakers are reluctant to expand an already radical stimulus unless the economy worsens sharply. Japan emerged from last year's recession but growth is set to slow to an annualised 1.3 percent in the second quarter from 3.9 percent in January-March, a Reuters poll showed. If consumption fails to pick up, the BOJ will come under pressure to do more particularly with inflation still distant from its target. But there are complications. The central bank may draw less praise than before from politicians for expanding stimulus, given growing complaints from them about the pain a weak yen inflicts on households through rising import costs, analysts say. "The government does not want further yen falls and such political factors may prevent the BOJ from easing," said Hidenobu Tokuda, senior economist at Mizuho Research Institute. (Additional reporting by Kaori Kaneko and Ritsuko Shimizu; Editing by Shri Navaratnam)
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