Japan's consumer spending unexpectedly fell in March at the fastest rate in a year, while real wages marked a twelfth month of decline on persistent inflation, highlighting the challenges facing the economy in mounting a strong post-COVID revival.

Tuesday's government data also reinforce the uncertainties around the Bank of Japan's policy outlook amid slowing global growth and financial sector worries even as expectations build for a phasing out of its ultra-easy monetary settings.

"Rising prices, while somewhat moderated by the government's energy subsidy programs, have put downward pressure on consumption by shaving households' real purchasing power," said Masato Koike, economist at Sompo Institute Plus.

Household spending fell 1.9% in March from a year earlier, the data showed, against economists' median forecast for a 0.4% rise and following a 1.6% gain in February.

It marked the biggest decline since March 2022's 2.3%, when Japan was still trying to curb the spread of coronavirus.

On a seasonally adjusted, month-on-month basis, spending decreased 0.8%, versus an estimated 1.5% increase and posting a second month of decline after being down 2.4% in February.

For the full fiscal year 2022 that ended in March, household spending rose 0.7%, slowing from 1.6% expansion in fiscal 2021.

Separate data showed Japanese real wages falling 2.9% in March, marking the full year of declines that started in April 2022 on decades-high consumer inflation.

Despite the boon from eased COVID-19 restrictions on domestic shoppers and international travelers, accelerating prices have put a lid on Japan's consumption-led recovery from the pandemic.

Nominal cash earnings gained 0.8% from the previous year, below analysts’ expectations and far from the 3% flagged by policymakers as necessary for supporting inflation.

Another weak result in wages adds to new BOJ Gov. Kazuo Ueda’s argument for maintaining easy policy for now. Falling real wages also point to declining spending power for voters as speculation continues that Prime Minister Fumio Kishida is mulling the possibility of an early election.

Clarifying the importance of pay for the central bank, the BOJ added a reference to wages in its policy guidance at the April meeting, Ueda’s first at the helm.

The governor said at a news briefing after the meeting that not only prices, but employment, corporate earnings and wages must also increase to achieve the central bank’s 2% inflation target stably.

"The BOJ won’t change its policy until its price target is met,” said economist Yuichi Kodama at Meiji Yasuda Research Institute. "The possibility of hitting the target is rising, but there’s still a distance to it. I don’t expect a major policy shift like scrapping yield curve control this year.”

For now the BOJ is relatively optimistic about wage increases this fiscal year. In its most recent quarterly report, the bank said that the results of the wage talks to date suggest sizable gains in both small and large businesses as well as part-time workers, citing figures from Japanese labor union Rengo.

Kishida is continuing to keep an eye on wage momentum, too. The prime minister attended Rengo’s May Day convention and said that in particular he wants to improve incomes for the younger generation.

In recent weeks support for Kishida has been increasing as he benefits from his firm stance on Ukraine and rapprochement with South Korea among other factors.

The timing of any early poll vote could play into central bank policy, as the BOJ may come under pressure not to make any changes that could cause ructions in the markets during a campaign period.

Looking ahead, analysts say slowing price inflation will lead to a rebound in pay in real terms.

Japan's economy likely expanded an annualized 1.4% in the January-March period and is set continue growing at the same pace in the April-June period, economists in the latest Reuters poll showed last month.