Core inflation in Japan's capital slows in December but no bar for further BOJ hikes

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Tokyo December core CPI up 2.3% yr/yr vs forecast +2.5%

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Index excluding fresh food, fuel rises 2.6% yr/yr in December

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BOJ next meets for policy meeting January 22-23

(Adds context in paragraphs 2-3, analyst quotes in paragraphs 4-5, factory output in paragraphs 10-11, retail sales in paragraph 12, government budget in paragraph 13, background in paragraph 16)

By Leika Kihara

TOKYO, Dec 26 (Reuters) - Core consumer inflation in Japan's capital slowed in December on moderating cost pressure for food but ?stayed above the central bank's 2% target, data showed on Friday, firming the case for further interest rate hikes.

The data backs up the Bank of Japan's view that core inflation ?will slide below its 2% target in coming months on easing cost pressure, before resuming a more demand-led increase that justifies ?additional rate increases.

But some analysts warn of the risk renewed yen declines may prod firms ?to keep raising prices, leading ?to sticky, cost-led inflation that could quicken the pace of BOJ rate hikes.

"Today's data suggests food inflation may be peaking. But the weak yen may give firms an ?excuse to resume price hikes for food, which may keep inflation elevated," ?said Yoshiki Shinke, senior executive economist at Dai-ichi Life Research Institute.

"The pace and timing of BOJ rate hikes will depend much on how the yen moves and how they affect firms' price-setting behaviour," he said.

The ?Tokyo core consumer price index, which excludes volatile costs of fresh ?food, rose 2.3% ?in December from a year earlier, less than market forecasts for a 2.5% gain and slowing from a 2.8% increase in November.

While the slowdown is largely due to the base effect of last year's bump-up in utility bills, ?it also reflected moderating pressure from food costs that have been the main factor pushing up broader inflation.

A separate index for Tokyo that strips away both fresh food and fuel costs - closely watched by the BOJ as a measure of demand-driven prices - rose 2.6% in December from a year earlier after a 2.8% increase in November.

The data will be among the factors the BOJ will scrutinise at its next policy meeting on January 22 and 23, when the board issues fresh quarterly growth and inflation forecasts.

GOVERNMENT APPROVES ?RECORD BUDGET

Separate ?data released on Friday showed Japan's factory output fell 2.6% in November from the previous month, more than market forecasts for a 2.0% drop, due to cuts in automobile and lithium-ion battery production.

Manufacturers surveyed by the government expect ?output to rise 1.3% in December and 8.0% in January, the data showed.

Retail sales rose 1.0% last month year-on-year, roughly in line with a median market forecast for a 0.9% increase, data showed.

Japan's government on Friday approved a record $785 billion budget for the next fiscal year, which will likely underpin consumption but add strain to the country's already tattered finances.

The BOJ raised interest rates last week to a 30-year high of 0.75%, taking another landmark step in ending decades of huge monetary support in a sign of its conviction Japan is progressing toward durably hitting its 2% inflation ?target.

With core inflation exceeding the BOJ's target for nearly four years, Governor Kazuo Ueda has signalled the BOJ's readiness to keep raising rates if the economy continues to improve, backed by solid wage gains.

In a speech on Thursday, Ueda said the economy was making steady progress in durably achieving the BOJ's price target backed by ?solid wage gains. (Reporting by Leika Kihara; additional reporting by Satoshi Sugiyama, Yoshifumi Takemoto and Makiko Yamazaki; Editing by William Mallard and Shri Navaratnam)