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Is Japan finally defeating its deflation demons?

Yoshikazu Tsuno | AFP | Getty Images

A rise in Japan's key inflationary gauge Friday raised hopes that the world's third-largest economy was on course to expel its inflationary demons, but analysts told CNBC there was still much work to be done.

Japan's nationwide core consumer price index (CPI) climbed 0.7 percent on year in September. While slightly lower than August's 0.8 percent rise, the rise marked the fourth consecutive uptick.

The steady rise will be welcomed by the country's central bank governors, who are aiming to reach a target of 2 percent inflation by the end of 2014, as part of the government's plan to radically overhaul the economy and end 15 years of deflation.

(Read more: Weak yen not enough to boost Japanese exports)

However, analysts told CNBC that it was too early to get excited over the recent inflation uptick.

"What we need to get the deflation demon out of the economy is a demand-driven improvement," said Martin Schulz, senior economist at Fujitsu Research Institute.

"Overall demand will be cyclical next year, but we will not see a stellar performance. We will have to wait for another year until deflation is really beaten in this economy," he added.

Many analysts have attributed the recent uptick in inflation data to higher energy import costs, rather than a substantial improvement in consumer spending or corporate investments, which effectively distorts the numbers.

(Read More: Why Japan stocks may storm higher even if the yen firms)

With several of Japan's key nuclear power stations suspended, the country has to rely on imports to meet its energy needs, which have become more costly given the yen's near 12 percent decline against the dollar this year.

Schulz, too, attributed the recent rise in inflation to energy costs skewing the data. He also saw the planned consumption tax hike from 5 to 8 percent next April as a potential headwind.

"Right now we have a build-up of additional demand before the consumption tax hike, which will be implemented next spring, after that we will have a drop," he said.

Other analysts were also reluctant to become too optimistic on Japan's inflation numbers.

"Even though we've seen positive numbers for four consecutive months, it will take a very long time for Japan to meet its 2 percent inflation target," said Junko Nishioka, chief Japan economist at RBS Securities.

Nishioka said two main factors were at play: the yen appears to have halted its weakening trend, pulling back to 97 to the dollar from 100 in early July; companies are still struggling to transfer input costs to their output prices.

(Watch This: Energy imports root of Japan trade deficit: Pro)

"The pace of [adjusting output prices] is very slow in Japan because most of the price makers have been suffering deflationary costs for a long time. So it's hard for them to increase output prices despite the more healthy condition of the economy," she said.

Meanwhile, Paul Donovan, managing director and deputy head of global economics at UBS told CNBC that although Japan's inflationary level seemed to be picking up, it was the "wrong sort of inflation."

(Read more: Abenomics speeds corporate investment, but not in Japan)

"You're seeing food and energy price inflation, wage deflation and consumer durable goods deflation. It's the worst possible inflation for getting a sustained recovery because it makes the consumer feel really bad," he said.

"You really need wage inflation and that isn't coming through at the moment. If people feel their incomes are higher, then they will be prepared to spend money in a meaningful way," he added.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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