Japan's household spending in May rose for the first time in more than a year, and a robust jobs market fuelled 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 and raised questions about its massive stimulus programme.
A tightening job market may allow for a sustained uptick in wages - an outcome the BOJ has been pushing for to stoke consumption, investment and durable economic growth.
The jobless rate was steady at 3.3 percent in May, the lowest in 18 years and close to levels policymakers consider as near full employment. Job availability also improved to hit the highest level in more than two decades, data showed on Friday.
But core consumer prices rose just 0.1 percent in the year to May, highlighting how far off the central bank is from hitting its 2 percent price goal and keeping alive expectations for more stimulus later this year.
"The big picture remains that there is still substantial spare capacity in the economy which is dragging down prices," said Marcel Thieliant, Japan economist at Capital Economics in a note to clients.
Household spending rose 4.8 percent in May from a year earlier, more than a median market forecast for a 3.4 percent gain, data by the Internal Affairs Ministry showed.
It marked the first increase since March last year, a sign consumers are finally starting to open their wallets after last year's sales tax hike knocked spending.
WAGE RISES MODEST
The BOJ hopes that tightening labour market conditions would lift wages, but the outlook remains uncertain as pay rises have been modest.
"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 slowdown in core consumer inflation, from 0.3 percent in April, should come as little surprise to the BOJ as it had expected price growth to stagnate for most of this year due to the effect of last year's oil price falls.
With inflation still distant from its ambitious 2 percent target, however, the central bank will remain under pressure to do more, analysts say.
All the same, there are complications. The BOJ 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, they 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.
Japan's economy emerged from last year's recession and expanded an annualised 3.9 percent in the first three months of this year as companies ramped up spending.