By Kaori Kaneko
TOKYO (Reuters) - Household spending in Japan rose at the fastest pace in four years in May, in a sign improving domestic demand will offer some support for an economy facing growing external pressure.
A recovery in private consumption is seen as vital in Japan's fight against deflation, which has made companies reluctant to pass on rising costs to households.
Household spending grew 4.0% in May from a year earlier thanks to Japan's 10-day holiday, government data showed on Friday.
It rose at the fastest pace since May 2015 and was much stronger than the median forecast for a 1.6% increase.
From the previous month, it rose 5.5% for the month, which compared with a 1.4% contraction in April and the median estimate for a 1.2% gain.
The government raised its view on household spending for the first time in four months, saying it is "picking up", an official said.
"Consumer spending in April-June is expected to have recovered from the previous month, which is likely to make up for some weakness in external demand," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute.
"But there is a risk that consumer spending will worsen as sentiment weakens amid sluggish wage recovery and uncertainty over the economic outlook. Also a planned sales tax hike could dent spending after it is implemented."
The strong growth in household spending in May was led by accommodation bills, mobile phone charges, transportation fees and electricity.
Separate data on Friday also pointed to encouraging signs for the economy.
Japan's coincident indicator index, which consists of a range of data including factory output, employment and retail sales, rose for a second straight month in May.
The government raised its assessment to say the index suggested the economy stopped worsening.
The U.S.-China trade dispute has clouded the outlook for the export-reliant economy, and the concern is that a hit to business and consumer confidence could affect overall domestic consumption and choke growth.
Top representatives of the United States and China are looking to resume talks next week to try to resolve a year-long trade war between the world's two largest economies.
Some policymakers in Japan also worry a proposed tax hike could add to the pressure on growth as a previous tax increase in April 2014 dealt a blow to consumers and triggered a deep economic slump.
Japanese Prime Minister Shinzo Abe has repeatedly said he will raise the sales tax to 10% this October as scheduled, unless there is a big economic shock on the scale of the collapse of Lehman Brothers.
The Bank of Japan is counting on an improvement in consumer spending to achieve its elusive 2% inflation target, having failed to fire up consumer prices despite years of heavy money printing.
The central bank last month kept monetary policy steady but governor Haruhiko Kuroda signaled a readiness to ramp up stimulus if global pressure on the economy intensifies.
(Reporting by Kaori Kaneko; Editing by Sam Holmes & Shri Navaratnam)
