By Leika Kihara
TOKYO (Reuters) - Japan's annual core consumer inflation quickened slightly in June but the rise was due largely to recent gains in oil costs with prices of other goods barely picking up, a setback for the Bank of Japan's mission to get inflation to 2 percent.
The core-core inflation index, which is closely watched by the BOJ because it strips away the effect of energy costs, slowed for the third straight month, undercutting the central bank's view that a solid economic recovery will nudge firms into raising prices.
The data reinforces market expectations that the BOJ will cut its inflation forecasts when it meets for a rate review on July 30-31, analysts say.
"The figures must be pretty disappointing for the BOJ because the rise in inflation was due almost entirely to energy costs. Prices of other goods aren't rising much," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"Consumption isn't strong so companies are struggling to raise prices. While the BOJ likely won't ease policy, the hurdle for whittling down stimulus is quite high."
The nationwide core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, rose 0.8 percent in June from a year earlier, matching a median market forecast. It followed a 0.7 percent increase in May.
The so-called core-core inflation index, a more closely watched gauge the BOJ uses to strip away the effect of both energy and fresh food costs, was up 0.2 percent in June, government data showed on Friday.
That was a slowdown from the previous month's 0.3 percent gain, a sign soft consumption is discouraging firms from passing on rising raw material and labour costs to households.
Of the total number of items comprising core CPI, 52.2 percent saw prices rise in June, down from 53.7 percent in May.
"We probably won't see core-core inflation rise strongly ahead," a government official told reporters in a briefing.
Core consumer inflation slowed for two straight months in April before flattening in May, prompting calls from BOJ officials to conduct a thorough analysis at the July rate review on why inflation remains stubbornly low despite solid growth.
At the meeting, the BOJ may concede that inflation could fall short of its target for as long as three more years, sources say, in what would the strongest sign yet of acceptance that its goal cannot be reached quickly.
That would tally with a Reuters poll out on Friday that found more than 40 percent of Japanese businesses believe it will take more than three years to reach the central bank's inflation goal of 2 percent and more than a quarter think the goal is an impossible objective.
Many analysts expect core consumer inflation to hover around 1 percent in the coming months and slow down after a scheduled sales tax hike in October 2019 undercuts consumption.
"We expect underlying inflation to climb to 1 percent by the end of next year," said Marcel Thieliant, senior Japan economist at Capital Economics.
"However, consumer spending will slump once the tax has been raised and price pressures will moderate again. The upshot is that the Bank of Japan's 2 percent inflation target remains out of reach."
(Reporting by Leika Kihara; Editing by Eric Meijer)