Tokyo inflation hits 22-yr high, inching toward BOJ goal

* Tokyo core CPI up 2.7 pct in April yr/yr, hits 22-yr high * Nationwide core CPI up 1.3 pct yr/yr, matches 5-yr high * Tokyo core CPI up 1.0 pct when excluding tax hike impact * Wage rises key in sustaining economic recovery (Adds more analyst's quote, details, background) By Tetsushi Kajimoto and Leika Kihara TOKYO, April 25 (Reuters) - Tokyo's inflation jumped to a 22-year high in April by a key measure, an early sign that companies are making progress in passing on a new tax increase to customers as policy makers seek to pull Japan out of years of deflation.

Friday's data for the capital, a leading indicator of national trends showed much tamer inflation when the impact of the sales-tax hike is excluded. This underscores the daunting challenge for Prime Minister Shinzo Abe and the Bank of Japan in generating a positive cycle of prices, wages and spending.

Tokyo's core consumer prices rose 2.7 percent from a year earlier, the interior ministry data showed in the first official reading of the April 1 tax increase. Stripping out the tax hike, prices were up 1.0 on year, the same pace as in March.

The price increase bolsters the BOJ's view that the world's third-biggest economy appears in the early days to be weathering the rise in the sales tax to 8 percent from 5 percent. But given the gradual pace of the pickup, expectations remain that the central bank will have to do more.

"Higher consumer inflation will erode consumers' purchasing power in the coming months as wages are unlikely to pick up as much, putting a lid on consumption," said Naoki Iizuka, an economist at Citigroup Global Markets Japan.

"Today's data did not change our view that the BOJ will ease policy again in June or July." For now, the BOJ can afford to wait on more data over the next few months to assess the tax-hike hit to consumption and growth, though it may not be able to quell doubts that inflation is on a steady path towards its 2 percent price goal.

After years of sub-par growth, the Japan's economy sped past its developed country peers in the first half of last year, spurred by Abe's massive fiscal and monetary expansionary policies.

Growth has slowed since then as exports and consumption lagged, prompting speculation that the BOJ will need to add to last year's monetary stimulus to safeguard a fragile recovery.

If inflation fails to pick up, it will cast doubt on the central bank's argument that underlying increase in prices will heighten inflation expectations, prompting companies to raise wages and help sustain a domestic demand-driven recovery.

The challenge for the BOJ was laid bare by nationwide core consumer inflation data for March, also released on Friday, which matched a five-year high of 1.3 percent but failed to pick up pace for a third straight month.

WAGE GROWTH KEY Markets expect the BOJ to hold off on easing at least until around July, when there will be more evidence on how the tax hike affected the economy, a recent Reuters poll showed.

The CPI figures will be among data the BOJ will scrutinise at its rate review next week, when it will update its long-term projections underlining its conviction that consumer prices will continue rising and hit 2 percent for two years from mid-2015.

The BOJ has argued that the Japanese economy is making steady progress toward achieving its 2 percent inflation target by around mid-2015. Comments from BOJ officials in recent weeks have sought to mollify concerns about the economic recovery after a series of soft data suggested a loss of momentum.

The central bank has also dismissed speculation it will be forced to deliver additional stimulus soon, and Governor Haruhiko Kuroda has repeatedly stressed that he saw no need to ease policy for the time being.

But the erosion of consumer spending power due to the sales tax increase underscores the need for long-stagnant wages to catch up with inflation to underpin consumption and help drive the economic recovery.

Friday's data showed that of the total items surveyed, prices rose for 414 of them, nearly double the number in March, but declined for 86 items, suggesting some firms remained hesitant to translate the higher costs to consumers.

The BOJ estimates that the sales tax rise will add 1.7 percentage points to Japan's annual consumer inflation in April and 2.0 points from the following month. The government ministry issuing CPI data does not crunch out such estimates.

The central bank has stood pat since offering an intense burst of monetary stimulus in April last year, pledging to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.

(Additional reporting by Kaori Kaneko; Editing by William Mallard and Shri Navaratnam)