By Leika Kihara and Sumio Ito
TOKYO (Reuters) - Japan's household spending unexpectedly fell in July from a year earlier after last month's spike, casting some doubt on the sustainability of a domestic demand-driven economic recovery seen as vital to boosting tepid inflation.
The data keeps pressure on policymakers betting that a tightening labor market will boost wages and lift consumption, thereby allowing companies to raise prices and help the Bank of Japan achieve its ambitious 2 percent inflation goal.
Household spending slid 0.2 percent in July from a year earlier after hitting a two-year high in June, government data showed on Tuesday, confounding a median market forecast for a 0.7 percent increase.
The jobless rate was flat at 2.8 percent in July and 1.52 jobs were available per applicant, the highest since 1974, separate data showed, a sign the economy continued to enjoy what many analysts consider as near full employment.
"We are not too worried about the slowdown in household spending in July as strong job growth continues to support household incomes," said Marcel Thieliant, senior Japan economist at Capital Economics.
"The upshot is that even though the tight labor market has yet to result in a marked pick-up in wage growth, strong job gains continue to support household incomes."
Japan's economy expanded at the fastest pace in more than two years in the second quarter as consumer and company spending picked up.
But price and wage growth remain stubbornly weak with firms still wary of passing on profits to employees, raising doubts over whether the second-quarter's bounce can be sustained.
The uncertain outlook on consumption has not only discouraged many companies from raising prices but has also driven some to cut prices.
Retail giant Aeon (T:8267) said last week it will cut the prices of 114 food and grocery items at 2,800 outlets to attract consumers, and make up the cost by streamlining operations.
Core consumer prices rose 0.5 percent in July from a year earlier, marking a seventh straight gaining month but still quite a distance from the BOJ's 2 percent target.