In April, the government raised the consumption sales tax to 8 percent from 5 percent to rein in the country's debt-to-GDP ratio. It was the first tax increase in 17 years. A second tax hike to 10 percent is planned for next year but is not set in stone. Prime Minister Shinzo Abe is expected to make a final decision in December based on the state of the economy.
Below-target inflation has raised speculation that the BOJ could pursue additional stimulus and may push back its inflation target to a later date. Investors will watch the central bank's policy meeting and biannual Economic Activity and Prices report, due later Friday, for further clues on this front.
Read MoreJapan retail sales rise at fastest pace since Q1 in September
"Replacing the 2 percent inflation target with less lofty goals would be premature lest the BOJ inadvertently undermine market confidence in "Abenomics", Mizuho said. "We think the BOJ will allude to downside risks to headline inflation from softer global oil prices, but not embark on further measures to bolster inflation. Rather, the BOJ will be closely watching political deal-making in late 2014 to enact the second installment of VAT hike."
Shortly after the data was released Japan's Economic Minister, Akira Amari, reiterated the government is ready to take steps to support the economy, but noted that no decision has been made on whether to compile a fresh economic stimulus package.
The BOJ undertook an unprecedented burst of monetary stimulus in April 2013 and has stood pat since.
Jobs and household spending
Japan's jobless rate rose to 3.6 percent in September, in line with expectations in a Reuters poll and up from 3.5 percent in August.
Meanwhile, the jobs-to-applicants ratio fell to 1.09 from 1.10 in August, in line with expectations. It marked the first decline since May 2011.
"Japan is now the fastest job creation machine in the OECD world. The reason for why Japan is starting to spend again is because there's confidence. The reason why they are borrowing is because they can. More and more people being employed on the full-time basis rather than part-time basis and that means you get access to credit," Koll added.
Household spending fell for a sixth straight month, down 5.6 percent on year, below expectations for a 4.3 percent decline in a Reuters poll and worse than a 4.7 percent decline in August. Month-on-month, spending grew 1.5 percent, below expectations for a 1.9 percent rise but up from a 0.3 percent rise in August.
Read MoreJapanese exports grow at fastest pace in 7 months
"The household spending number shows sequential growth. That bodes well for consumers [who are] finally starting to come back," Koll said.
"What matters is the [recent] retail sales data, which was uni-vocally above expectations. You also find that domestic travel data is improving nicely and bank credit lending is actually beginning to accelerate," he said, "so the empirical evidences show that Japan's household is starting to come back."