By Leika Kihara and Takahiko Wada
TOKYO (Reuters) -Core inflation in Japan's capital slowed in August for the second straight month but remained well above the central bank's 2% target, data showed on Friday, keeping policymakers under pressure to phase out decades of massive monetary stimulus.
The data for Tokyo, which is seen as a leading indicator of nationwide trends, adds to recent signs of broadening inflationary pressure in the world's third-largest economy.
The Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.8% in August from a year earlier, against a median market forecast for a 2.9% gain. It slowed from a 3.0% rise in July and exceeded the Bank of Japan's 2% target for the 15th straight month.
Analysts expect inflation to keep slowing in coming months reflecting recent declines in commodity prices and the base effect of last year's sharp rises.
But an index that strips away both fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of broad price trends, held steady at 4.0% in August, highlighting the risk of inflation remaining stubbornly high, analysts say.
"Inflation likely peaked in June but isn't slowing as much as expected, suggesting that companies aren't done raising prices," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"The outlook depends largely on whether consumers can continue to weather price hikes. It's very hard, probably even for the BOJ, to predict the future path of inflation."
While government subsidies drove down utility bills, food and daily necessities continued to see prices rise such as a 9% jump in those for seafood and a 15.5% gain for toilet paper.
While much slower than a 4.0% year-on-year rise in goods prices, services costs were up 2.0% in August after gaining 1.9% in July, the data showed.
A spike in global commodity prices last year drove many Japanese companies to shed their aversion to price hikes and pass on higher costs to households, keeping inflation above the BOJ's target for longer than policymakers initially expected.
The inflation overshoot led the BOJ to make modest tweaks to its bond yield control policy last month, a move investors saw as a shift away from decades of ultra-loose monetary policy.
But Governor Kazuo Ueda has ruled out the chance of an early exit from ultra-loose policy, saying that it needs to wait until wages rise enough to keep inflation sustainably around 2%.
Prime Minister Fumio Kishida on Tuesday unveiled plans to cushion the blow from rising prices that is likely to include an extension to gasoline and utility subsidies that expire in September - a move that will weigh on inflation.
The BOJ has said it is focusing more on trend inflation that strips away one-off factors, such as government subsidies to curb rises in gasoline and utility bills, deciding policy.
Several indices seen as key gauges of trend inflation hit record highs in July, heightening the case for a retreat from decades of ultra-loose monetary policy.