At last, inflation in Japan is speeding up

Shubiya district, Tokyo, Japan
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Shubiya district, Tokyo, Japan

Japanese consumer prices rose in June at their highest annual pace since November 2008, a sign perhaps that the Bank of Japan (BOJ) is slowly winning its fight to end two decades of deflation and boost prices in the world's third largest economy.

Japan's core consumer price index, which excludes volatile food prices, rose 0.4 percent year-on-year, turning positive after a flat reading in May.

It was the first time in 14 months that consumer prices have risen. The figure came in just above the expectations of analysts polled by Reuters for a 0.3 percent increase.

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"The inflation numbers are going in the right direction, so the BOJ is probably going to be pleased," said Bank of Singapore's Chief Economist Richard Jerram.

The BOJ unveiled an aggressive monetary stimulus program in April to meet a 2 percent inflation target over a two-year horizon.

Its plan to pump $1.4 trillion into the economy by the end of 2014 has helped weaken the yen, which is in turn helping push up inflation. Japan's currency has weakened about 15 percent against the dollar so far this year.

(Read more: Weak yen? Think again)

The Tokyo core CPI, seen as a good indicator of what will happen to prices across the country, rose 0.3 percent in July after a 0.2 percent increase in June, in line with market expectations.

Not so Fast

Still, analysts said investors should exercise a degree of caution and broader signs of an increase in prices in the Japanese economy are still needed for the BOJ to successfully meet its 2 percent inflation target in two years.

They pointed out that when food and energy prices are stripped out, Japan's CPI fell 0.2 percent in June from a year earlier.

"We can safely say that the CPI numbers were better-than-expected, so that's the modest good news," said Vishnu Varathan, market economist at Mizuho Corporate Bank. "But if you exclude oil and food prices, the CPI was still negative – so the takeaway here is that underlying inflation is still not picking up on a broad basis."

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Most economists expect prices to inch higher in Japan as an economic recovery picks up steam and the yen weakens, although there is some skepticism about whether inflation can hit BOJ's 2 percent goal.

"It [inflation] is trending up, but whether that's enough to get to 2 percent is debatable," said Bank of Singapore's Jerram.

"The currency needs to go down another 8-10 percent to help boost inflation," he added.

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The yen was trading at about 99.23 per dollar on Friday, below the key 100-level. Most currency strategists expect the yen to weaken towards the 105-110 area against the dollar by the end of the year.

"By and large what is good news for the economy should be negative for the currency and I would be surprised if it [recent yen strength] was a consistent trend," Michael Woolfolk, senior currency strategist at BNY Mellon, told CNBC Asia's "Squawk Box."

—By CNBC's Dhara Ranasinghe; Follow her on Twitter @DharaCNBC.