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UPDATE 2-Japan's slow inflation, manufacturing slump could draw early BOJ action

Leika Kihara and Daniel Leussink

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* May core CPI up 0.8% yr/yr, matches forecast

* May core-core CPI up 0.5% vs +0.6% in April

* Flash PMI falls in June as new orders slump

* Market expectations growing for July BOJ easing (Adds analyst quote, PMI & context on BOJ policy)

TOKYO, June 21 (Reuters) - Japan's core consumer inflation slowed in May and factory activity shrank in June, underlining the growing stress on the economy and keeping the central bank under pressure to expand its radical stimulus programme, possibly as early as next month.

The soft batch of data highlight the challenge the Bank of Japan faces in spurring inflation towards its 2% target, as trade frictions and slowing global growth threaten to derail the country's economic recovery.

The core consumer price index, which includes oil products but excludes volatile fresh food costs, rose 0.8% in May from a year earlier, government data showed on Friday, matching a median market forecast and slowing from a 0.9% gain in April.

A separate private survey on Friday showed manufacturing activity contracted again in June as new orders fell at the fastest pace in three years, a sign slowing Chinese demand was taking a toll on Japan's export-reliant economy.

The BOJ kept monetary policy steady on Thursday but signalled its readiness to ramp up stimulus, joining central banks across the world that are shifting towards more easing as the escalating U.S.-China trade war raises fears of a global recession.

"If companies cannot translate rising costs to households, core consumer inflation could slow to around 0.5% to 0.6% in the latter half of this year," said Mari Iwashita, chief market economist at Daiwa Securities.

"The BOJ may respond to negative developments in overseas economies in July by changing its forward guidance and pledging to keep ultra-low interest rates longer," she said.

The so-called core-core CPI, which strips away the effects of volatile food and energy costs, was up 0.5% in May from a year earlier, the government data showed.

JULY EASING?

Japan's economy expanded by an annualised 2.1% in the first quarter but many analysts predict growth to slow in coming quarters as the U.S.-China tariff row hurts business sentiment. A scheduled sales tax hike in October may also curb consumption, they warn.

Any downturn in business spending could cast doubt on the BOJ's argument a sustained economic recovery will gradually prod firms to boost prices and wages, helping inflation accelerate.

BOJ Governor Haruhiko Kuroda signalled on Thursday his readiness to ramp up stimulus "without hesitation" if the economy loses momentum, fuelling market expectations of action as early as next month.

"The BOJ may be forced to take action if the yen comes under upward pressure, as European and U.S. central banks are leaning toward more accommodative monetary policies," said Takeshi Minami, chief economist at Norinchukin Research Institute. (Additional reporting by Kaori Kaneko; Editing by Sam Holmes)