By Satoshi Sugiyama and Leika Kihara

TOKYO (Reuters) -Japanese household spending unexpectedly fell in May, government data showed on Friday, as higher prices continued to squeeze consumers' purchasing power, further threatening the fragile economy.

Consumer spending contracted 1.8% in May from a year earlier, far short of the median market forecast for a 0.1% uptick, as rising food prices weighed on spending for other items.

Consumption is among key factors the Bank of Japan (BOJ) is scrutinising to gauge the strength of Japan's economy and decide how soon to raise interest rates.

The weaker yen weighed on spending, including pushing down demand for overseas package tours, a government official told reporters at a briefing.

On a seasonally adjusted, month-on-month basis, spending decreased 0.3% versus an estimated 0.5% rise.

Sluggish private consumption is a source of concern for policymakers striving to achieve sustained economic growth underpinned by solid wages and durable inflation, which are prerequisites for normalising monetary policy.

BOJ Governor Kazuo Ueda has said he expects consumption to recover as big wage hikes offered by many Japanese companies, and government subsidies to curb electricity bills, prop up household income.

"I still think consumer spending is on a recovery trend in April-June, given rising wages and income tax cuts that kicked in from June," said Atsushi Takeda, chief economist at Itochu Economic Research Institute, adding that he expects the BOJ to raise interest rates in September.

The Japanese economy shrank more than initially reported in the January-March quarter, the government said earlier this week, in a rare, unscheduled revision to gross domestic product (GDP) data.

Economists, though, expect GDP to rebound this quarter thanks to higher wages and capital spending driving up domestic demand. A survey conducted by Japan's largest trade union group showed workers' monthly pay will rise 5.10% on average this fiscal year, the biggest hike in three decades.