Japanese annual inflation hit a decade-high 1.2 percent in March, as energy prices soar, but the central bank is expected to sit tight on interest rates in the face of a soft economic outlook at home and abroad.
Like other central banks, the Bank of Japan faces rising fuel, raw materials and food prices as it ponders what to do with interest rates, already at a very low 0.5 percent in Japan.
"It is hard to think that the Bank of Japan's stance on monetary policy will change just because of a rise in cost-push inflation," said Mamoru Yamazaki, chief economist at RBS Securities.
Japan's core consumer price index, which excludes volatile fresh food prices but includes oil products, rose 1.2 percent in March from a year earlier, matching a consensus market forecast and marking the biggest annual rise since a 1.8 percent increase in March 1998.
After nearly a decade of deflation, Japanese consumer prices have finally set out on a clear rising trend in the past few months, with the pace of growth picking up since late last year.
But the rise is not because of stronger demand, as the Bank of Japan had hoped, and price hikes of household goods ranging from bread and milk to beer and noodles have hurt consumer sentiment as wages remain stagnant.
"The price rises are being led by upward pressure from higher raw material costs and not by strong demand, so it is not a good pattern," Economics Minister Hiroko Ota told a news conference after a cabinet meeting.
The yen was steady near 104.35 yen to the dollar after the data.
June 10-year government bond futures tumbled to a four-month low, but the fall was mainly due to a jump in Tokyo stocks and expectations that the U.S. Federal Reserve may take a break from its aggressive interest rate-cutting campaign.
The Bank of Japan downgraded its view on the nation's economy this month and said growth was slowing, dropping a reference to the economy expanding -- a phrase it had consistently used in its monthly report for nearly two years.
But BOJ Governor Masaaki Shirakawa said the world's second-largest economy would move back into a moderate expansionary trend near its potential growth rate, which central bankers see around 1.5 percent now.
With uncertainty over the global economy persisting, market participants now expect the central bank to keep interest rates on hold at 0.5 percent for several months.
"The best choice for the BOJ for now is to take a neutral stance," said Seiji Adachi, senior economist at Deutsche Securities.
While there is no need to rush to a rate cut, inducing expectations for higher interest rates in the wake of rising prices would only hurt the economic recovery, he said.
When the BOJ's policy board meets next Wednesday, it will release a twice-yearly outlook report on the economy and prices. The board is expected to cut its growth forecast for the current fiscal year to next March from its previous forecast of a 2.1 percent expansion.
The core consumer price index in the Tokyo area, out a month before the nationwide figures, rose 0.7 percent in April from a year earlier, above a median forecast for a 0.5 percent rise.
The pace of growth in nationwide inflation has been faster than that in Tokyo because people outside the capital use cars more frequently to get around, so higher gasoline prices have been more heavily reflected in the data.