Here’s One Item Driving Inflation in Japan

Getty Images

Consumer prices in Tokyo rose for the first time since 2009 in May and one product was a key driver for this surprise inflation - televisions.

"The higher than expected increase for Tokyo inflation was driven by price increases for flat panel TVs. Looking back 3-4 years, TV prices have been declining by 20-30 percent on an annual basis. But we are seeing some bottoming out - this is a good sign," Junko Nishioka, chief economist Japan at RBS told CNBC, adding that utility costs also contributed to the rising index.

Tokyo's consumer price index (CPI) for May rose 0.1 percent month on month, government data showed on Friday. The Tokyo CPI is a leading indicator of Japan's overall inflation trend as it is published a month ahead of nationwide figures.

(Read More: Japan's Deflation Abates)

On a year-on-year basis the city's CPI fell 0.2 percent. However, monthly comparisons are particularly important at the moment, said economists, given the government and central bank's recent radical policy shift.

In its push to beat deflation and put an end to two decades of anemic growth, the Bank of Japan in January doubled its inflation target to 2 percent accompanied by a commitment in April to double its monetary base within two years.

(Read More: Japan to Hit 2% Inflation by End of 3 Years: BOJ)

Television prices rose 14.5 percent month on month, according to JPMorgan, pushing the "culture and recreation" sub-index up 0.5 percent in May.

This is important because it reflects an improvement in household consumption, which has been a central driver for deflation over the past 15 years, Nishioka said. Household spending rose 1.5 percent in April from a year earlier, according to government data.

Nationwide inflation is now likely to turn positive on an annual basis by May, said Nishioka, noting that her earlier forecast was for this to take place in June.

National overall CPI for April, also released on Friday, showed prices rising 0.3 percent from the previous month, but declining 0.7 percent from a year earlier.

(Read More: 'It's a Big Momentfor Japan': Fed's Bullard)

However, economists say the pace of inflation will be slow and gradual. "We think the trend of CPI prices is gradually moving from deflation to inflation, very gradually though," Masamichi Adachi, senior economist at JPMorgan told Reuters.

Market players reacted positively to improving consumer prices in the world's third largest economy, with the Nikkei 225 trading up 1.6 percent in the morning session.

"Inflation in positive territory has to be something to cheer about," said Michael Woolfolk, managing director and senior currency strategist at The Bank of New York Mellon.

Markets are paying close attention to Japan's inflation print and thus it is vital for the deflation situation to turn around, he said.

"I think there is an issue that if we're not able to show appreciable inflation by the end of this year, it may become an issue not only for markets but also for [Prime Minister] Abe himself," Woolfolk added.

By CNBC's Ansuya Harjani