Japanese inflation in January matched a decade-high 0.8 percent from a year earlier, illustrating the problem the Bank of Japan faces as it juggles rising prices with a faltering economy.
The inflation data, coming on the heels of a weak industrial output figure on Thursday that raised worries about a slowdown in the economy, did nothing to alter the perception that the Bank of Japan may cut rates given the looming risk of a U.S. recession.
Financial markets did not react much as investors awaited other data later in the day, including eurozone inflation and U.S. personal consumption, to gauge the impact of the U.S. subprime crisis on the global economy.
The Japanese core consumer price index, excluding volatile prices of fresh fruit, vegetables and seafood but including energy costs, rose 0.8 percent in January from a year earlier, government data showed on Friday.
"The CPI data showed that inflation is not accelerating much, with price rises so far mostly limited to energy-related goods and some food. That's because the economy is not very strong," said Yoshimasa Maruyama, economist at BNP Paribas. "The price trend will be similar in all developed countries. Inflation is high at the moment, but it will ease in the future."
Japanese share prices dropped more than 2 percent and the 10-year Japanese government bond yield rose to a one-month high, although their moves were not so much a reaction to the data as a follow-up to moves by their U.S. counterparts.
The inflation reading matched a decade high of 0.8 percent rise in December but fell short of market forecast of a 0.9 percent rise.
Still, the recent spike in inflation is considered unlikely to warrant a BOJ rate hike.
"In an ordinary situation that's a level for the BOJ to become vigilant," said Susumu Kato, chief economist at Calyon. "Given the current global economic and market conditions, the BOJ can't take any action. It will wait and see for a while."
The BOJ has kept its key overnight call rate at 0.5 percent since raising it by a quarter-point a year ago. Many market participants expect the central bank to sit tight at its two-day policy board meeting that kicks off on Thursday.
Japan's overall household spending rose 3.6 percent in January from a year earlier in price-adjusted real terms, far above a median forecast of a 0.2 percent rise.
Although the government data is widely seen as unreliable, when coupled with strong retail sales data released on Thursday it points to firm consumption in January.
It also suggests consumers are not tightening their purse strings, even though consumer sentiment has been constantly falling in the past several months largely because of price hikes on daily products.
But because wages are hardly rising, many economists think consumption will be tepid in coming months.
Data also showed job conditions did not improve in January.
Japan's seasonally adjusted jobless rate stayed flat at 3.8 percent in January, in line with the market consensus.
The jobs-to-applicants ratio for January was 0.98, meaning 98 jobs were available per 100 applicants, higher than a median forecast of 0.97 but matching a two-year low marked in December.
Worries grew that the Japanese economy might grind to a halt or even contract in the first quarter of this year, after Thursday's data that showed industrial output fell twice as much as expected in January.
But a separate survey on Friday showed manufacturing activity in Japan grew in February, marking the fourth straight month of expansion but at a slower pace due to a slowdown in exports.
"This morning's batch of data suggests external demand, consumption and capital spending remain relatively solid," said Junko Nishioka, an economist at ABN Amro. "The first-quarter gross domestic product will probably maintain positive growth."
The Japanese economy grew at an annual clip of 3.7 percent in the final three months of last year, compared with a meager 0.6 percent U.S. growth during the same quarter, as robust exports and capital spending offset softness in personal consumption.