The Bank of Japan looks set to announce another round of stimulus.
Data released on Friday showed consumer prices in May fell at their sharpest pace since 2013, delivering another blow to the central bank's efforts to goose an economy that has struggled to muster inflation for nearly three decades.
Japan's core consumer prices fell 0.4 percent in May from a year earlier, government data showed on Friday.
The core consumer price index, which includes oil products but excludes fresh food prices, matched economists' median estimate for a 0.4 percent annual decline.
Business statement meanwhile stayed flat, although the survey was conducted before last week's referendum in the U.K. where voters decided to leave the European Union (EU).
The soggy economic data comes in the backdrop of a sustained rise in the Japanese yen, which has risen sharply against peers after skittish investors piled into assets perceived to be safe after the uncertainty following the U.K. referendum.
The dollar/yen par was trading around 103 Friday morning in Asia, down from 111 at the end of May.
So far, Japan has refrained from directly intervening in the yen, which would contravene agreements with its Group of 7 partners to avoid unilateral action in the currency market, but the BOJ may do so if dollar/yen drops below 100, Capital economic's senior Japan economist, Marcel Thieliant, told CNBC's "The Rundown".
With underlying inflation now clearly weakening, the BOJ will likely announce more stimulus later this month, Capital Economic's Thieliant, said in a note.
Expectations of additional stimulus also bolstered a rally in Japanese government bonds. The 10-year yield was down 1 basis point at minus 0.245 percent, a historic low. The five-year yield also declined to a record trough of minus 0.330 percent.
The house's own estimates of underlying inflation, which excludes energy and fresh food, fell to a 11-month low of 0.8 percent from a year ago.
The core consumer price index, which includes oil products but excludes fresh food prices, matched economists' median estimate for a 0.4 percent annual decline.
Also released Friday were results of a survey of business confidence at big Japanese firms which showed that sentiment was flat from a quarter ago but better than what economists polled by Reuters expected.
However, analysts noted that most results would have been submitted before the U.K. voted to leave the European Union in a referendum last Thursday.
The headline index for BOJ's "tankan" survey stood at plus 6 in June, unchanged from the previous survey in March and better than the median estimate of plus 4.
"The actual sentiment could be even worse than the headline figures," Natixis Japan Securities economist, Kowei Iwahara told CNBC's "Squawk Box".
Iwahara expects the BOJ to introduce stimulus measures such as lower lending rates and prolonging the Japanese government bond maturity period.
-Reuters contributed to this article