Japan's core annual inflation accelerated to a new decade-high in June on continued rises in energy costs, adding to the Bank of Japan's policy dilemma as it juggles the risks of inflation and slowing economic growth.
Still, many economists expect the central bank to keep interest rates on hold as it is thought to be more concerned about the damage soaring oil and food prices may have on corporate profits and personal consumption.
"Prices are rising, but I don't think the Bank of Japan has a choice about raising interest rates at least for another year because prices are not being pushed up by demand," said Yoshikiyo Shimamine, chief economist at Dai-ichi Life Research.
The core consumer price index (CPI), which excludes volatile fresh food prices but include oil prices, rose 1.9 percent in June from a year earlier, data showed on Friday, matching a consensus forecast.
It was the biggest annual climb in inflation since a 2.0 percent rise in January 1998 and marked a jump from the 1.5 percent annual increase logged in May.
Core CPI in the Tokyo area, available a month before the nationwide figures, rose 1.6 percent in July from a year earlier, also matching a median market forecast.
Financial markets brushed off the numbers as they did little to change the view that the BOJ will not be able to raise rates despite rising prices, as Japan's growth prospects are threatened by slowing exports and sluggish domestic demand.
JGB futures climbed instead on a drop in stocks, rising 0.68 point to 135.83.
Rising raw materials costs are hurting corporate profits and dampening consumer sentiment, prompting economists to forecast a slight contraction in Japan's April-June economic growth.
The BOJ has left monetary policy steady since February last year, when it hiked rates to 0.5 percent.
It scrapped its tightening bias in April to adopt a neutral stance on policy, as the U.S. downturn and high crude oil prices clouded the nation's economic outlook.
BOJ Governor Masaaki Shirakawa said last week that tightening monetary policy in response to soaring raw material costs would be inappropriate, and that the central bank was putting equal focus on inflation and the downside risks to the economy.