By Leika Kihara and Stanley White
TOKYO (Reuters) - Japan's household spending slid in June but real wages rose at their fastest pace in more than 21 years thanks to higher summer bonuses, a sign the benefits of a prolonged economic recovery are broadening.
Household income also marked the fastest gain in three years on an increase in temporary workers' pay, offering some hope for Bank of Japan policymakers struggling to accelerate inflation to their elusive 2 percent target.
The figures come ahead of Friday's release of second-quarter gross domestic product (GDP) data, which will likely show the economy expanded an annualized 1.4 percent after contracting in the previous quarter.
"Consumption has emerged from a soft patch in the first quarter and will underpin economic growth," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"Export growth is stagnating, so we may not see external demand drive the economy. But that will be offset by strong capital expenditure and improvements in consumption."
Household spending fell 1.2 percent in June from a year earlier, government data showed on Tuesday, marking the fifth straight month of declines. But the fall was smaller than market forecasts of a 1.6 percent slide and a 3.9 percent drop in May.
While spending on housing renovations fell, consumers spent more on beverages, air conditioners and eat-outs due partly to hot weather during the month, the data showed.
"Household spending continued to fall but we're seeing some positive signs," said a government official who briefed reporters on the data, adding that spending may turn up in July as households spend their bonuses handed out at the end of June.
Households' inflation-adjusted income rose 4.4 percent in June, the biggest increase since July 2015, as a tightening job market pushed up temporary workers' pay, the data showed.
Separate data showed workers' real wages rose 2.8 percent in June from a year earlier, accelerating from a 1.3 percent increase in May and marking the fastest pace of growth since January 1997.
Signs of rising wages would be encouraging for the BOJ, which trimmed its inflation forecasts last week and blamed Japan's entrenched deflationary mindset for keeping price growth subdued.
Private consumption has been a soft spot in the economy as slow wage growth prevents households from loosening their purse strings, in turn discouraging companies from hiking prices and keeping inflation far from the BOJ's 2 percent target.
Although companies may now be finally raising wages to address a tightening job market, their business prospects could be clouded by escalating protectionism and fears the United States may impose auto import tariffs that would devastate Japan's exports.
Some analysts warn that growth may be peaking for Japan's economy, which had enjoyed the longest streak of expansion since the 1980s bubble economy before shrinking in January-March.
Factory output fell 2.1 percent in June, marking the second straight month of decline. Toyota Motor Corp said higher U.S. auto tariffs would ramp up the cost of vehicles produced locally and those imported from Japan.
Such risks could cast a cloud over the BOJ's assumption that continued economic expansion would push inflation to its target.
Economists polled by Reuters expect core consumer prices to rise just 1.0 percent in the next fiscal year to March 2020, far below the BOJ's projection of 1.5 percent.
"As long as inflation is hovering around 1 percent, the BOJ will maintain its ultra-easy policy. It likely won't move toward an exit for much of next year," said Minami of Norinchukin.