Japanese industrial production jumped in August and is seen rising further despite global market turmoil, while core consumer prices fell from a year earlier for the seventh straight month as expected.
The data did little to alter views that the Bank of Japan will keep interest rates on hold while uncertainty over U.S. economy is lingering, helping to send Japanese government bond futures up half a point.
"If you cut through the volatility, it does look like industrial output is picking up in response to a rise in export volumes," said Richard Jerram, chief economist at Macquarie Securities Japan.
Japan's industrial production rose 3.4% in August from a month earlier, beating the median market forecast for a 3.2% rise.
Manufacturers' output, the core component of production, is expected to fall 0.8% in September but jump 4.1% in October, government data showed on Friday.
The trade ministry also upgraded its assessment on output, saying industrial output is on a moderate rising trend, instead of its previous assessment that it is flat.
The data may augur well for the Bank of Japan's tankan corporate survey on Monday. Many investors are looking to the tankan for clues on how recent market mayhem has been affecting corporate sentiment.
Japan's industrial production has been sluggish so far this year, due to inventory adjustments in the high-tech sector.
"I think we can say inventory adjustment in the electronic device sector is over," said Yoshimasa Maruyama, economist at BNP Paribas Securities.
But Maruyama said it would be too early to conclude that Japanese production will weather a likely slowdown in the U.S. economy following credit and housing strains.
"If there is to be some impact, that will show up in orders in September at earliest. Then companies may reduce production, probably in the fourth quarter. I think automobile makers are the most sensitive and they are holding the key," Maruyama said.
Japanese core consumer prices, which excludes volatile fresh food prices, fell 0.1% in August from a year earlier as expected, marking the seventh straight month of annual declines.
In the Tokyo area, the core CPI fell 0.1% in September compared with a year earlier, slightly below the consensus forecast of a flat reading.
"Nationwide core CPI is likely to remain in negative territory in September. We still don't see a sign of consumer prices going above zero and picking up speed in an upward move," said Mamoru Yamazaki, chief economist at RBS Securities. "It is basically in line with BOJ's view, so it is neutral to BOJ's policy," Yamazaki added.
The BOJ has said consumer prices will pick up in the long term as the economy is growing steadily and the bank must raise interest rates gradually. Many economists also expect core CPI to start rising in October-December quarter.
Still, most investors expect the BOJ to keep the key policy target rate steady at 0.5% next month as central bankers assess any economic fallout from the recent market turmoil, triggered by U.S. subprime mortgage woes.
Swap contracts on the overnight call rate are now pricing in slightly more than 50% chance of a rate hike by December.
Elsewhere, Japan's seasonally adjusted unemployment rate rose to 3.8% in August from near-decade low of 3.6% in July, despite market expectations of a flat reading.
Overall household spending rose 1.6% in August from a year earlier, beating a median market forecast of a 1.2% rise.
The next focus in the market is Monday's quarterly tankan survey, which is expected to show a slight deterioration in business sentiment among big Japanese manufacturers.
Japan's economy contracted slightly in the last quarter due to weak capital spending, but economists expect the world's second-largest economy to rebound in the July-September quarter.