Japan's stock market has been hit by problems in the US

The nationwide core consumer price index (CPI) rose 0.8% from a year earlier, government figures show.

The data indicated the rise was down to firms passing on the cost of rising food and energy prices to consumers, rather than higher consumer spending.

For this reason, it is thought that Japanese interest rates will not rise beyond 0.5% soon, and could even fall.

This view was supported by the narrowing of the country's trade surplus in December, as exports fell and record oil prices pushed up the value of imports.

Return to deflation?

There are fears that the fragile economic recovery in Japan will be knocked off course by a sharp slowdown in the US, which is a key export market for some of the country's biggest firms.

This has fuelled a sharp sell-off in Japanese stocks in recent weeks and many analysts now predict that the Bank of Japan could cut interest rates from their current level of 0.5% to lift the domestic economy.

The economics minister, Hiroko Ota, said that Japan had not made a huge move away from the deflationary environment, which plagued the country for more than a decade.

But she added: "Looking ahead, the economy will likely expand moderately under stable prices towards the next fiscal year.