TOKYO - Core inflation in Japan's capital in October dipped below the central bank's 2% target for the first time in five months, data showed on Friday, potentially complicating the central bank's quest to raise interest rates further.

Closely watched services inflation this month also slowed, casting doubt on the Bank of Japan's expectations that higher wages would broaden cost pressure beyond goods and keep price rises durably around its 2% target.

"To the BOJ's disappointment, price hikes that reflect rising labour costs are not spreading much in the service sector, which may be a cautionary signal for its price outlook," said Saisuke Sakai, a senior economist at Mizuho Research & Technologies.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food costs, rose 1.8% in October year-on-year, decelerating from a 2% gain in September but outpacing a median market forecast of 1.7%.

A separate "core-core" index that strips away the effects of both fresh food and fuel costs, closely watched by the BOJ as a broader price trend indicator, rose 1.8% in October from a year earlier after a 1.6% rise in September.

The Tokyo inflation figures are considered a leading indicator of nationwide trends and among factors the BOJ will scrutinise at next week's policy meeting, when the board releases fresh quarterly growth and price forecasts.

Some temporary factors affected this month's inflation data, with the government's resumption of subsidies to curb utility bills pushing down core inflation while rice shortages drove up the core-core index.

Takeshi Minami, chief economist at Norinchukin Research Institute, said the latest data would not be something that would derail the BOJ's policy normalisation push.

"We continue to expect the BOJ to at least discuss another rate hike in December," he said.

The latest data showed services prices in non-public sectors rose 1.1% year-on-year in October, slower than a 1.2% gain in September.

Japanese firms typically make biannual revisions to prices for goods and services in October. This means service inflation for the month is a closely watched indicator for clues on whether demand-driven price gains are broadening enough to justify further rate hikes.

"This suggests that businesses in service sectors are still cautious about the outlook of consumption," Norinchukin's Minami said. "Consumption is not strong enough yet to allow them to pass on rising labour costs, despite the BOJ's expectations for gradual rises in services prices."

Separate data showed on Friday that the prices Japanese companies charge each other for services, another service-sector inflation indicator, rose 2.6% in September from a year earlier, slowing from a revised 2.8% rise in August.

BOJ Governor Kazuo Ueda has said the bank will keep raising rates if inflation remains on track to stably hit 2% as it projects.

A slim majority of economists polled by Reuters saw the BOJ forgoing a hike this year, with most expecting the central bank to raise rates again by March next year.

(Reporting by Makiko Yamazaki; Editing by Sam Holmes)