Industrial production in October rose 1.6% from the previous month, the Ministry of Economy, Trade and Industry (METI) said, beating a market consensus forecast for a 0.5% decline.
The yen rose against the dollar and the euro and benchmark euroyen futures slipped on the stronger-than-expected output figure, but some economists remain wary about a rise in inventories in the information-technology sector.
"Up until last month, production data has suggested it was peaking out, but the latest data shows that the underlying trend of strong production remains intact. The data is very good," said Takeo Okuhara, a bond strategist at Daiwa Institute of Research.
Many traders expect the BOJ to raise the overnight call rate target to 0.5% from the current 0.25% by March. Most see a rate hike in January, while some are still betting on a policy
tightening when the BOJ's policy board meets next on Dec. 18-19.
As the BOJ has recently stressed that it is focusing on data analysis to decide the timing of the next rate increase, financial markets are keeping a close eye on economic indicators to gauge the strength of the Japanese economy.
Wednesday's data also showed manufacturers' output -- the core component of production -- is expected to rise a further 2.7 percent in November and then edge up 0.1 percent in December.
The trade ministry maintained its view that industrial output is on a rising trend.
But some economists pointed to a pile-up of stocks in the electronic parts and devices sector, which the central bank also closely watches.
The sector's inventories rose 0.1 percent in October from the previous month while its shipments fell 1.1 percent.
"The headline figure was a positive surprise as many had forecast a decline. But one thing to worry about is a continued rise in inventories in the information-technology sector," said Noriaki Haseyama, economist at Dai-Ichi Life Research Institute.
With the strong production figure, I think the BOJ's view that the economy is firm will remain unchanged. But a risk of inventory adjustments remains on the horizon and that would make it hard for the BOJ to conduct an early rate hike."
A recent mixed bag of data has raised some concerns that robust corporate sector activity may be losing steam and that weakness in personal consumption, the lion's share of the economy, may not be temporary.
A sharp fall in machinery orders in July-September had scaled back expectations for a December rate hike, but central bankers, including BOJ Governor Toshihiko Fukui, have generally been bullish on the economy.
Fukui said this week before the release of the production data that the recent mixed economic data do not indicate a fundamental change in economic conditions.
He also said the central bank will further analyse developments in the corporate sector through other indicators such as the BOJ's quarterly tankan corporate survey, which is released on Dec. 15 just ahead of the next BOJ policy meeting.