The Bank of Japan (BOJ) forecast today that consumer prices would start rising next year and government data showed prices were flattening out.
The positive outlook, suggesting Japan's five-year bout with deflation may be nearing an end, was kept in check, however, by concern that China's interest rate rise could dampen demand for Japanese goods and hamper the country's export-led economic recovery.
The BOJ has promised to maintain its ultra-loose "quantitative easing" monetary policy until annual consumer prices rise.
Data earlier in the day showed the nationwide core CPI, which excludes volatile fresh food prices, was flat in September, slightly above economists' median forecast of a 0.1 per cent drop.
Other economic indicators on Friday were fairly upbeat. Japan's unemployment rate fell to 4.6 per cent in September from 4.8 per cent in August while average spending by wage earner households, a key gauge of personal consumption, was up a real 0.3 per cent in September from the same month last year.
The data and the BOJ report had little effect on financial markets and traders said they were more concerned about the implications of China's rate rise, the first in nearly a decade.
The stock market was particularly worried about whether it would hurt demand for exports and the Nikkei average ended down 0.75 per cent at 10,771.42, closing as the BOJ report came out.