By Leika Kihara and Satoshi Sugiyama
TOKYO (Reuters) -Japanese households' inflation expectations rose in the three months to early March, a central bank survey showed on Friday, leaving scope for another interest rate hike this year.
Aside from consumption, wages and price moves, inflation expectations are among key factors the Bank of Japan looks at in deciding when to scale back stimulus.
Of the households surveyed by the BOJ, 83.3% said they expected prices to rise a year from now, up from 79.3% in the previous survey three months ago.
The survey, conducted between Feb. 8 and March 5, also showed that 80.6% of households expected prices to rise five years from now, up from 76.5% in the previous poll.
The results show Japan has made some progress towards sustainably hitting the central bank's 2% inflation target and heighten the chance of another interest rate hike this year.
The BOJ's "tankan" survey, released on April 1, also showed firms projecting inflation to stay above 2% five years from now, suggesting corporate inflation expectations are becoming anchored around the central bank's target.
"If economic and price conditions move in line with our current projections, trend inflation will gradually accelerate. If so, we must consider reducing the degree of stimulus," BOJ Governor Kazuo Ueda told parliament on Tuesday.
But the rising cost of living, which is behind households' heightening inflation expectations, could curb consumption and discourage firms from hiking wages, some analysts say.
When asked what items they increased spending for compared with a year ago, 52.6% replied food followed by 32.4% for daily necessities, Friday's survey showed.
Dining out, clothing and travel topped the list of items respondents spent less on compared with a year ago, the survey showed, suggesting rising living costs were forcing households to slash discretionary spending.
The weakness in consumption has been a drag on Japan's fragile economic recovery. Household spending fell for a 12th straight month on February as many consumers have yet to see wage growth exceed the pace of inflation.
A poll by think tank Japan Center for Economic Research, released on Wednesday, showed analysts expect Japan's economy to contract an annualised 0.54% in the first quarter due to weak consumption and output, before rebounding by 1.69%.
In March, the BOJ ended eight years of negative interest rates and other remnants of its unorthodox policy, making a historic shift away from its focus on reviving growth with massive monetary stimulus.
A Reuters poll taken shortly after the March move showed more than half of economists expect another rate hike this year, with October-December the most popular bet on the timing.