* Nationwide core CPI up 0.5 percent yr/yr in July
* Tokyo core CPI up 0.4 percent in August
* Weak inflation data seen keeping BOJ under pressure
* Retail giant Aeon announces price cuts (Adds analyst quotes, detail)
TOKYO, Aug 25 (Reuters) - Japan's core consumer prices rose 0.5 percent in July from a year earlier to mark a seventh straight gaining month, a sign the economy is making steady but painfully slow progress toward meeting the central bank's 2 percent inflation target.
The increase was largely driven by higher fuel bills as subdued wage growth discouraged consumers from increasing their spending, underscoring the challenge the Bank of Japan faces in achieving its ambitious price goal.
The rise in the nationwide core consumer price index (CPI), which includes oil products but excludes volatile fresh food prices, matched a median market forecast and followed a 0.4 percent gain in June.
"Inflationary pressure isn't building up as companies remain extremely cautious of raising prices. The boost from energy costs will peak around October, so consumer inflation may slow after that," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"The BOJ will likely be forced to cut its price forecasts again, so it would be hard to justify raising interest rates even as economic growth gathers momentum."
Core consumer prices in Tokyo, available a month before the nationwide data, were up 0.4 percent in August from a year earlier, against a 0.3 percent gain projected in a Reuters poll.
"The slow grinding rise in Tokyo inflation...is encouraging," ING said in a research note, adding that the 2 percent inflation target "remains, as it always was, a hugely over-optimistic and not very credible goal."
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.
Slightly over half of the items in the index saw prices rise in July, while 34 percent saw prices fall. Given that labor costs are rising in a tight job market, few analysts expect widespread price-cutting to lure back consumers.
But retail giant Aeon said on Wednesday 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.
"I don't think many companies will start cutting prices as there are limits to how much you can squeeze costs through streamlining. But there's a risk they will hold off on price hikes for as long as possible," Dai-ichi Life's Shinke said.
While food and energy prices rose, cellphone costs fell as intensifying competition forced big carriers to slash charges.
The government will consider reflecting charges from start-up discount smart-phone carriers in CPI data from next January at the earliest, a government official told reporters, a move that could further weigh on consumer price inflation.
The BOJ has had to push back the timing for reaching its price target six times since it deployed a massive stimulus program in 2013.
It now expects inflation to hit 2 percent in the fiscal year ending in March 2020, arguing that a tightening job market and solid economic growth will gradually push up prices.
ING said the efforts of Prime Minister Shinzo Abe and BOJ Governor Haruhiko Kuroda to achieve the 2 percent target were "at least dragging inflation in the desired direction, and as such, their efforts are unlikely to be slackened any time soon." (Reporting by Leika Kihara; Editing by Eric Meijer)