By Tetsushi Kajimoto
However, the pace of gains slowed sharply on a month-on-month basis, suggesting that consumption may not be strong enough to spur economic growth in the current quarter or back the central bank's optimistic views.
July's 1.5 percent annual increase in retail sales topped the Reuters poll median forecast for 1.2 percent, trade ministry data showed on Thursday. It followed a 1.7 percent gain in June.
On a seasonally-adjusted basis, retail sales grew just 0.1 percent in July from the previous month, far below June's 1.4 percent increase.
"The upshot is that private consumption started Q3 on a soft note," said Marcel Thieliant, senior Japan economist at Capital Economics.
"However, the fundamentals for a continued improvement in spending remain in place," he said in a note. "Both employment and wages are growing strongly so household incomes are expanding rapidly."
Consumer spending is picking up moderately with more companies raising wages, as labour shortages stemming from Japan's ageing population force firms to pay better to find and retain workers.
ELUSIVE TARGET
A rise in private consumption, which makes up about 60 percent of economic activity, could lift consumer prices, which would help the central bank accelerate the inflation rate to its elusive 2 percent target.
The conceded last month that inflation could remain below its target until early 2021.
"Employment and household incomes are not so robust as the BOJ thinks," said Azusa Kato, senior economist at BNP Paribas Securities. "As such, private consumption is likely to pull back from a rebound seen in the April-June quarter."
One factor pushing up July retail sales was higher gasoline prices. Other gains involved online retailers and items such as medicines and cosmetics while a heat wave lifted food and beverage purchases.
These offset declines in sales of clothes and other items at department stores after June clearance sales.
The economy rebounded in April-June, led by strong household and business spending, but risks from global trade tension cloud the outlook for export-reliant Japan.
Japan's annual core consumer inflation, which includes oil products but excludes volatile fresh food prices, held steady at 0.8 percent in July, well below the BOJ's 2 percent price goal, data showed last week.
(Reporting by Tetsushi Kajimoto; Editing by Sam Holmes and Richard Borsuk)
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)