Japan is watching the effects of global market upheaval

The nationwide core consumer price index fell 0.1% from a year earlier, according to the Ministry of Internal Affairs and Communications.

Economists are still expecting a return to inflation later this year, meaning that the Bank of Japan could still consider raising interest rates.

There was better news on unemployment which fell to a fresh nine-year low in July, the Economics Ministry said.

The unemployment rate fell to 3.6% from June's rate of 3.7%.

The ministry also said the number of people out of work fell for the 20th consecutive month, dropping 340,000 from the same month a year earlier to 2.34 million.

Moderate recovery

The Economics Minister, Hiroko Ota, said the data showed that Japan's recovery remained firm overall, but she was closely watching for any impact the US sub-prime mortgage crisis might have on the economy.

"The domestic economy is in line with the Bank of Japan's upbeat scenario: a moderate recovery of the economy with very stable prices," said Takehiro Sato, an economist at Morgan Stanley.

"That said, the ongoing concerns about the global liquidity crunch might mean the Bank of Japan won't be able to hike rates in September, and the next hike may be delayed until December at the earliest," he added.