By Leika Kihara
TOKYO (Reuters) - More than 80 percent of Japanese households expect prices to rise a year from now, the highest ratio in nearly five years, a Bank of Japan survey showed, a sign the bank's pledge to spur 2 percent inflation through its aggressive asset purchases may be changing public perceptions that deflation will persist.
The quarterly survey contains good news for retailers in Japan. Household sentiment about the economy in general improved to a seven-year high, suggesting that consumer spending may sustain its recent gains despite tepid wage growth.
More than half of households in the central bank's survey said they feel prices have risen compared with a year ago, the highest level in nearly two years, according to the BOJ's household survey published on Friday.
Among respondents, 80 percent said they expect prices to be higher one year from now, up from 74 percent in the previous survey in March. The latest level is the highest since September 2008, when a spike in global commodity costs drove up gasoline and crude oil prices.
"It's hard to tell how much of the expectation is driven by rising costs of food and oil, and how much by monetary policy. But there's no doubt more households expect prices to rise ahead," said Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute in Tokyo.
"Wages may gradually start to rise early next year as corporate profits increase. That means the positive effect (of the BOJ's monetary easing) will gradually spread and support consumer spending," he said.
Economic data so far paint a picture of slow but steady improvement, with a modest annual rise in retail sales but a drop in household spending in May.
But there is growing evidence that the "feel-good effect" of Prime Minister Shinzo Abe's policies to shore up the economy were encouraging more Japanese to loosen their purse strings.
A quarterly BOJ report scrutinizing regional economies, issued on Thursday, pointed to strong sales of luxury watches and cars. Consumers were also willing to pay more for travel and dining, the report said.
Earlier this week, Fast Retailing <9983.T>, operator of the Uniqlo clothing stores, reported a 20 percent year-on-year rise in sales in June. The operator of Japan's biggest convenience store chain, 7-Eleven <3382.T>, which also has department store branches, recorded a record jump in first quarter profit.
At the high end, Tiffany & Co<TIF.N>, reported improved demand in Japan for its upscale jewelry. In a sign of confidence in the market's strength, it later joined Apple <AAPL.O> and other leading brands in raising their Japanese prices in response to the yen's fall.
In the latest BOJ survey - and reflecting the positive mood - the diffusion index gauging household sentiment on the economy improved 17.8 points to minus 4.8 in June, the best in seven years.
The index is calculated by subtracting the ratio of those who feel conditions have worsened from those who believe they improved. A negative reading means pessimists still outnumber optimists.
The BOJ stunned markets in April by offering an intense burst of monetary stimulus, pledging to double its holdings of government bonds and boost purchases of risky assets to meet its target of achieving 2 percent inflation in two years.
Expectations of aggressive money printing by the BOJ helped weaken the yen, while hopes that Prime Minister Shinzo Abe's reflationary policies will end decades of deflation and economic stagnation drove up Tokyo share prices.
With the weak yen supporting Japanese exports and consumer spending on the rise, the BOJ is likely to revise up its assessment of the economy next week to signal that it is recovering.
ANOTHER POSITIVE INDICATOR
Separate government data on Friday showed an indicator measuring current economic conditions, used to determine whether the economy is expanding or contracting, rose in May for the sixth straight month. That led the government to raise its assessment on the index, also suggesting that the economy has already recovered.
Rising energy and food prices, mostly due to the weak yen that inflates the cost of imports, have already affected overall prices. Core consumer prices stopped falling in May, for the first time in seven months.
But wage growth remained flat in May for the second straight month, casting doubt on whether the recent strength in consumer spending is sustainable.
In the BOJ survey, more than 80 percent of those who expected prices to rise said such a development was undesirable, suggesting that many households still doubt whether wages will rise fast enough to meet higher living costs.
The BOJ's survey has gained importance as among the few indicators to gauge inflation expectations in Japan, because the central bank's current policy framework emphasizes the need to change public perceptions that deflation will persist in spite of aggressive monetary stimulus.
The latest survey, conducted from May 10 to June 5, targeted 4,000 households, of which 2,273 replied.
(Additional reporting by Tomasz Janowski; Editing by Richard Borsuk)