By Leika Kihara and Kaori Kaneko
TOKYO (Reuters) - Japan's annual consumer inflation stalled in July and government pressure on carriers to cut smartphone charges could undercut prices ahead, further hindering the central bank's efforts to achieve its elusive price target.
An index stripping away the effect of volatile fresh food and energy costs barely rose, a sign the gain in consumer prices was driven more by higher energy costs than a pickup in private consumption, analysts said.
Stubbornly soft inflation could delay the BOJ's exit from ultra-loose policy. It would also be a setback for premier Shinzo Abe's reflationary "Abenomics" policies, as he eyes re-election in his ruling party's leadership race in September.
"Consumer price gains remain driven by volatile fresh food and energy inflation while underlying inflation remains subdued," said Marcel Thieliant, senior Japan economist at Capital Economics.
"Price pressures should strengthen ahead of next year's sales tax hike but inflation is set to remain well below the BOJ's 2 percent inflation target."
The nationwide core consumer price index (CPI), which includes oil prices but excludes volatile fresh food prices, rose 0.8 percent in July from a year earlier, unchanged from the previous month's gain and falling short of a median market forecast for a 0.9 percent increase.
The so-called core-core index, a more closely watched gauge the BOJ uses to strip away the effect of both energy and fresh food costs, was up 0.3 percent year-on-year in July after rising 0.2 percent in June, government data showed on Friday.
The data underscores the challenge the central bank faces in eradicating Japan's entrenched deflationary mindset that discourages firms from raising prices for fear of scaring away cost-sensitive consumers.
Adding to uncertainty over the prospects for hitting the BOJ's price goal, top government spokesman Yoshihide Suga was quoted by media as saying that Japanese carriers have room to slash smartphone usage charges by 40 percent.
The government hopes that by reducing the burden of smartphone costs for households, it can stimulate spending in other areas and boost overall consumption.
But if smartphone users don't immediately start spending elsewhere this measure could backfire particularly for the BOJ, because a 40 percent cut in smartphone costs could push inflation into negative territory.
Estimates from government and private analysts show a 40 percent cut in smartphone usage fees could push down core CPI by roughly 0.96 percentage point.
"Cutting wireless fees could prompt consumers to spend more on other things like dining and entertainment. But there's also a chance they could save rather than spend," said Satoshi Osanai, senior economist at Daiwa Institute of Research.
Subdued wage and price growth have forced the BOJ to extend its massive stimulus programme despite the rising risks of the policy, such as the hit to bank profits from near-zero interest rates.
The BOJ last month conceded that inflation will miss its elusive 2 percent target until early 2021 and took steps to make its policy framework more sustainable.
Many private analysts expect core consumer inflation to hover around 1 percent for the rest of this year.
"Companies can't hike prices because consumption lacks strength," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"The BOJ has just slashed its inflation forecasts, but probably needs to cut them again at some point."
Japan's economy rebounded in the second quarter from a contraction in the first three months of this year thanks to robust business spending.
While labour shortages force companies to hike hourly pay for temporary workers, they remain reluctant to raise permanent workers' salaries for fear of incurring higher fixed costs.
(Additional reporting by Sumio Ito and Izumi Nakagawa; Editing by Eric Meijer)
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