But the 0.7 percent annual rise in core consumer prices, which was the second straight month of gains, continued to be driven mostly by increasing energy costs and a weak yen that inflates the cost of fuel and raw material imports.

That may hurt corporate revenues down the road, but for now analysts welcomed the increase as a sign the economy is recovering enough to allow companies to pass on higher costs to consumers.

"The majority of gains in consumer prices still come from energy, and the upward pressure on energy prices is likely to start to slow in coming months," said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFG Morgan Stanley Securities in Tokyo.

"Things are basically on track for the Bank of Japan, but I would not get overly optimistic on prices just yet."

The jobless rate fell to its lowest in nearly five years and household spending edged up in July, separate data showed Friday – encouraging signs for Prime Minister Shinzo Abe's efforts to revive the economy.

The annual rise in the core consumer price index, which includes oil products but excludes prices of fresh food, was slightly higher than a median market forecast of 0.6 percent.

It was the biggest increase since a 1.0 percent gain in November 2008. It followed a 0.4 percent rise in June, which was the first increase in more than a year, data from the Ministry of Internal Affairs and Communications showed.

The so-called core-core inflation index, which excludes food and energy prices and is similar to the core index used in the United States, slid 0.1 percent in the year to July, a slower pace of decline than the previous month's 0.2 percent fall.

Factory output rose 3.2 percent in July after falling 3.1 percent in June, government data showed, suggesting robust domestic demand made up for some of the weakness in shipments to emerging nations. It was lower than a median forecast for a 3.7 percent increase.

Manufacturing activity expanded in August for the sixth consecutive month, a PMI survey showed, as machinery makers and consumer goods companies increased output due to solid domestic demand.

Japan's economy grew an annualized 2.6 percent in April-June to mark the third straight quarter of expansion as a pick-up in exports added to sustained strength in personal consumption, although the growth was slower than market expectations.

The BOJ unleashed an intense burst of monetary stimulus in April to try to end deflation and reach its target of 2 percent inflation in roughly two years. It is widely expected to maintain the stimulus settings at a policy meeting next week.