Japanese core consumer prices fell from a year earlier in September, as expected, marking the eighth straight month of decline and doing little to change expectations that the Bank of Japan's monetary policy will be on hold for now.
But government data also showed Tokyo area prices were flat in October, signaling that the nationwide index too is likely to stop falling in October and to rise in the following months, economists said.
Cheaper mobile phone price plans that Japanese operators will introduce next month will not be reflected in the consumer price index, the government said, providing relief to those who had feared the CPI could be brought down sharply otherwise.
"Overall this means things are moving in line with the Bank of Japan's scenario as they have been saying that CPI would turn positive soon," said Mamoru Yamazaki, chief economist at RBS Securities.
After the latest CPI and output data, swap contracts on the overnight call rate are pricing in less than a 20 percent chance of a BOJ rate rise by the end of this year, little changed from the level before the data.
Japanese core consumer prices, which exclude volatile fresh food prices, fell 0.1 percent in September from a year earlier as expected. In the Tokyo area, the core CPI was flat in October compared with a year earlier, also matching expectations.
Consumer prices have been falling slightly from a year ago since February as constant price falls in high-tech products such as flat-screen TVs and computers have outweighed higher food prices.
But economists have said the core CPI is likely to start rising as early as October, bolstered by oil prices. U.S. crude futures hit a fresh record high of $91.10 per barrel earlier on Friday.
The government said on Friday it would not include the new, cheaper mobile phone fees that could have trimmed 0.3 percentage point or more from core CPI.
"The decision is that the new cellphone fees won't be included, so that will have a neutral impact and the Bank of Japan is probably breathing a sigh of relief," Yamazaki said.
But that alone will not be sufficient for the BOJ to raise interest rates, given lingering fears about the impact of the recent global market turbulence on the real economy.
BOJ chief Toshihiko Fukui said last week he had grown more certain that Japan's economy remains on a sustained growth path, but he also stressed that uncertainty remains over the outlook in light of global market turmoil.
Masamichi Adachi, senior economist at JPMorgan Securities, said, "We expect the next rate rise in January-March, but that would depend on the global economy and a rise in Japanese workers' wages."
Market participants are now focused on the BOJ's twice-yearly outlook report on economy and prices due on Oct 31.
Japan's industrial production fell 1.4 percent in September from a month earlier, almost in line with the median market forecast for a 1.3 percent fall, separate data showed.
That meant production grew a stellar 2.2 percent in the July-September quarter, after doldrums stemming from inventory adjustments in Japanese high-tech sector in the first half of this year.
"That should keep the BOJ's view on the corporate sector unchanged," said Tatsuo Ichikawa, a strategist at ABN AMRO Securities. "The data should not change the market's expectations for a BOJ monetary tightening."
Manufacturers' output, the core component of production, is expected to rise 3.8 percent in October and drop 0.7 percent in November, the data also showed.
"We need to be cautious about on whether production, especially that of automobiles for the U.S. market, will continue," said Yoshimasa Maruyama, economist at BNP Paribas.
Data earlier this week showed U.S.-bound exports dropped in September.
"If that continues in October, it's inevitable that production will fall," Maruyama said.