UPDATE 1-Japan CPI stops falling, labour market improves
(Adds details, economist's quote)
* May core CPI 0.0 pct yr/yr, matching forecasts
* Output +2.0 pct from March vs forecast +0.2 pct
* Manufacturers forecast output picking up
* Data shows economy on track for steady growth
TOKYO, June 28 (Reuters) - Japan's consumer prices stopped falling in May and labour demand reached its strongest level in five year, further signs the government's expansionary policies are making some progress towards ending 15 years of deflation.
Industrial production rose more than expected in May in a sign of strength in the corporate sector, but an unexpected fall in household spending may raise some concerns about activity.
On the whole, the data signal steady economic growth, but it may take more time to achieve sustained rises in prices and the Bank of Japan's two-year time frame for achieving 2 percent inflation still seems unlikely.
"The results are mostly due to energy prices. The output gap is shrinking, but the core-core CPI shows that final demand is still weak," said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting.
"It's possible for the BOJ to ease again later this year, when it becomes clear that there's not enough progress in reaching its price target."
Core consumer prices, which exclude fresh food but include energy, were unchanged in May from a year earlier, matching the median estimate from a Reuters poll.
It was the first time in seven months that prices did not fall. Prices fell an annual 0.4 percent in April.
Japan's core-core CPI, which excludes both food and energy, fell 0.4 percent in the year to May, following a 0.6 percent annual decline in April, the government data showed.
The BOJ unleashed the world's most intense burst of stimulus on April 4, promising to inject $1.4 trillion into the economy by buying government debt and riskier assets to meet its pledge of achieving 2 percent inflation in roughly two years.
Many private sector economists say the two-year target is overly ambitious. Even one member of BOJ's policy board has publicly called on the bank to loosen this time frame.
Separate data on the labour market showed the jobs-to-applicants ratio rose to 0.90 in May from 0.89 in April, meaning jobs were available for 9 out of 10 job seekers. This marks the strongest demand for workers in five years.
The unemployment rate was unchanged at 4.1 percent.
Wage earners' household spending fell 1.6 percent in May from a year earlier, sharply below the median estimate for a 1.4 percent increase.
Consumer spending is likely to expand as some shoppers buy more luxury goods and next year's sales tax hike prompts a last-minute buying spree, but some economists warn that spending will eventually slow as wages have not increased.
Industrial output rose 2.0 percent in May from April and the outlook is for slight net growth in coming months, data from the Ministry of Economy, Trade and Industry showed.
Manufacturers expect their output will fall 2.4 percent in June before increasing 3.3 percent in July, partly due to improving demand for cars from the United States.
In another encouraging sign, the Markit/JMMA Japan Manufacturing Purchasing Managers Index showed manufacturing activity expanded in June at the fastest pace in more than two years.
Japan's economy grew at an annualised rate of 4.1 percent in January-March, as private consumption and a rebound in exports led a recovery from a slump last year.
(Editing by John Mair)