By Tetsushi Kajimoto and Stanley White
TOKYO (Reuters) - Japan's core consumer prices rose for a ninth straight month in March from a year earlier and labor demand improved - further evidence the economy is making headway against years of deflation and stagnation.
Ministry of Finance data showed household spending and retail sales weakened in February as snowstorms across Japan kept many consumers at home, but there are already signs that sales are accelerating this month as shoppers rush to beat a sales tax hike on April 1.
The dip in consumer spending may be disappointing to some, but continued tightness in the labor market could bolster expectations that the economy can weather the sales tax rise to 8 percent from 5 percent, and rebound after a temporary slump in the April-June quarter.
"The gradual increase in prices is consistent with a narrowing in the negative output gap," said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management. (A negative output gap shows the economy is performing below full capacity.)
"The employment situation will also continue to put some mild upward pressure on prices. Consumer spending came in weak, but it will rebound next month."
The 1.3 percent annual gain in the core consumer price index, which includes oil products but excludes volatile fresh food prices, matched the median estimate in a Reuters poll.
The gain followed a 1.3 percent rise in January and December, which was the quickest since the 1.9 percent seen in October 2008.
The narrower inflation index, which excludes food and energy prices and is similar to the core index used in the United States, rose 0.8 percent in the year to February.
That matched a high last hit in April 1998 - a sign Japan is pulling further away from deflation.
Japan's consumer inflation has accelerated in the past several months since turning positive last June, with the Bank of Japan's aggressive monetary easing driving down the yen. Analysts believe inflation may slow in coming months as the weak yen's tendency to drive up import prices fades away.
Given this trend, many economists doubt that the central bank can achieve its aim of hitting a 2 percent inflation target in about a year, due to the persistent output gap and companies' reluctance to significantly increase capital spending and raise wages.
Analysts polled by Reuters expect the BOJ to ease policy further by the summer to stimulate growth and accelerate inflation.
Analysts expect the economy to contract in the April-June quarter as consumer spending dips after the sales tax hike takes effect, before rebounding in July-September.
Separate government data showed Japan's jobless rate fell to 3.6 percent in February, the lowest in more than six years.
The jobs-to-applicants ratio edged up to 1.05, meaning available jobs outnumber jobseekers. The ratio matched the median estimate and hit its highest since July 2007, underscoring the strength of the job market.
Retail sales grew an annual 3.6 percent in February, exceeding the median estimate for a 3.2 percent annual gain, but below January's 4.4 percent as a series of snowstorms hit consumer spending.
Household spending tumbled 2.5 percent after inflation in the year to February, versus the median estimate for a 0.1 percent increase, another sign of bad weather disrupting economic activity in February.
(Editing by Eric Meijer)