By Tetsushi Kajimoto
TOKYO (Reuters) - Japan's core consumer inflation slowed to near 2-1/2-year lows in September, dragged down by sliding energy prices and raising the chance the central bank will top up its already massive monetary stimulus at its review this month.
The data will be among indicators the Bank of Japan will scrutinize at its Oct. 30-31 meeting, when it conducts a quarterly review of its growth and price forecasts.
Stubbornly subdued inflation underscored the challenge the BOJ faces in accelerating inflation to its elusive 2% goal at a time the world's third-largest economy grapples with risks from a global slowdown and this month's sales tax hike.
"Today's data provides another reason for the Bank of Japan to ease policy at the meeting in two weeks," said Marcel Thieliant, senior Japan economist at Capital Economics.
"We still expect the bank to keep its short-term policy rate unchanged amid concerns about financial stability."
The BOJ, under its current forecasts issued in July, expects core consumer inflation to hit 1.0% in the current fiscal year ending in March 2020 and fall short of its 2% target for the following two years.
But the BOJ estimates appear rosier than private-sector economists. Capital Economics expects underlying inflation to fall toward zero next year.
The nationwide core consumer price index (CPI), which includes oil products but excludes fresh food prices, rose 0.3% in September from a year earlier, government data showed, matching a median market forecast and slowing from a 0.5% gain in August.
It marked the slowest consumer inflation since April 2017, when the index rose 0.3%, the data showed. Prices of 297 items rose but 168 items fell, while 58 others were unchanged.
Underscoring fragile domestic demand, an index stripping away the effects of fresh food and energy costs, which is seen by the BOJ as a key gauge of inflation, was up 0.5% in the year to September, slowing from the previous month's 0.6% gain.
READY TO ACT
With inflation stubbornly low, the BOJ has signaled its readiness to expand stimulus by issuing a strong warning about overseas risks that threaten the economy and inflation momentum.
"The BOJ will appropriately guide policy without preconception, while monitoring various risks," Deputy Governor Masayoshi Amamiya told an annual meeting of credit associations.
The central bank must "patiently continue" its powerful monetary stimulus to maintain price momentum, he said, adding that inflation will likely accelerate gradually to its 2% goal.
Two-thirds of economists polled by Reuters expect the central bank to loosen monetary policy this month. Some 28 of 37 economists said the BOJ had already started laying the groundwork for deepening negative rates.
Governor Haruhiko Kuroda had said the move was among options the central bank would consider if it was to ease again, despite concerns such a move could further hurt profits at financial institutions struggling with already thin margins.
Slowing global demand and the fallout from the U.S.-China trade war have taken a toll on exports and business morale, clouding the outlook for Japan's economy and leaving the BOJ in a bind.
Policymakers also worry that the export-reliant economy may lose support from domestic demand if the sales tax hike to 10% deals a blow to consumer sentiment and household spending.
Years of heavy money printing have failed to prop up prices and change the public mindset that inflation will be subdued, dashing the hopes of the central bank that aggressive monetary stimulus will help put a decisive end to deflation.
With interest rates already at zero and companies wary about boosting spending, many analysts doubt whether further easing would help accelerate inflation.
(Editing by Sam Holmes and Jacqueline Wong)
