UPDATE 1-Japan Sept CPI data shows progress towards deflation exit

Tetsushi Kajimoto
Thursday, 24 Oct 2013 | 8:26 PM ET

(Adds analyst's quote, details)

* Sept nationwide core CPI +0.7 pct yr/yr, matching forecast

* Core-core CPI stops falling for first time in almost 5 yrs

* Inflation driven largely by energy, weak yen

* Still a long way to go in meeting BOJ inflation target

TOKYO, Oct 25 (Reuters) - Japan's core consumer prices rose in September from a year earlier for a fourth straight month and held near the fastest pace in nearly five years, government data showed on Friday, in a sign the economy is heading towards an exit from deflation.

The 0.7 percent annual gain in the core consumer price index, which includes oil products but excludes volatile prices of fresh food, matched the median forecast by economists.

It was slightly slower than August's 0.8 percent increase, which was the fastest pace since November 2008, data from the Ministry of Internal Affairs and Communications showed.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, was flat in September from a year earlier, the first time this measure of prices has not fallen in almost five years.

"The pace of growth has slowed slightly due to slower gains in energy prices, but travel and food prices have risen, showing consumer spending is placing upward pressure on prices," said Hidenobu Tokuda, economist at Mizuho Research Institute.

"We are making progress in the escape from deflation."

The data would be encouraging for Prime Minister Shinzo Abe, who has pursued a mix of aggressive fiscal and monetary policy to reflate the economy. The idea is that sustained increases in consumer prices after 15 years of deflation would lead to a cycle of growth, brisk business expenditures and higher wages.

Core consumer prices in Tokyo, available a month before nationwide data, rose 0.3 percent in October from a year before, also matching the median forecast.

BOJ Governor Haruhiko Kuroda, who unleashed massive monetary stimulus in April to achieve a 2 percent inflation target in roughly two years, has reiterated consumer inflation is expected to gradually increase, with signs price rises are spreading beyond energy and food costs.

Some analysts expect core consumer inflation will top 1 percent by the end of 2013 due largely to energy and food prices. But many see the BOJ's goal as overly ambitious for an economy saddled with a big output gap while companies remain hesitant to significantly boost spending and raise wages.

The central bank holds its next policy meeting on Oct. 31, when it will also issue economic and price projections.

Japan's growth has outpaced its Group of 7 rich-country peers so far this year, but whether its pace can be sustained remains to be seen as capital spending - a weak spot in the economy - has only recently started to show signs of recovery.

(Editing by John Mair)