Japan Releases Positive Economic Data

Still, government authorities remained cautious.

"Since there was a long period of deflation we need to make a careful decision on whether the economy has really overcome it," Chief Cabinet Secretary Yasuhisa Shiozaki said Friday. "We need to make sure the situation will not return to deflation."

Economy Minister Hiroko Ota warned that excluding prices for oil prices, actual year-on-year price changes are around 0 percent and said the government needs to guard against falling back into deflation.

The comments seemed indirectly aimed at suggesting another interest rake hike by the BOJ was not immediately needed. Ota said she hopes the BOJ shares the administration's policy goals, but said the central bank must decide its own policies independently.

New Finance Minister Koji Omi meanwhile said he plans to hold his first meeting with U.S. Treasury Secretary Henry Paulson on the sidelines of the Group of 20 financial gathering in Australia in November, Kyodo News reported.

On the labor front, Japan's unemployment rate remained unchanged at 4.1 percent in August, just a hair above an eight-year low of 4.0 percent reached earlier this year and matching the forecast of economists surveyed by Dow Jones.

The number of unemployed fell by 120,000 people from a year earlier to 2.70 million, marking the ninth straight month of declines, while the number with jobs rose by 220,000 to 64.27 million, marking the 16th straight month of increases.

One cause for alarm, however, was a 4.4 percent decrease in spending in August by Japanese households headed by wage earners. The indicate households are spending less as the pace of wage increases slows.

The figure was much worse than an average forecast of a 1.7 percent drop, according to a Dow Jones survey of economists.

For the five last years, Japan has mounted an economic comeback from more than a decade of doldrums, under reforms ushered in by Koizumi. But the new premier faces a host of challenges including taxation problems, a growing gap between rich and poor, massive government debt, a shrinking population and a lingering oversensitivity to U.S. downturns.