Core prices rose for a 12th straight month from a year earlier due to high energy costs. It went up at a slower pace than in August, when inflation hit 2.4 per cent, the fastest since October 1997.

Uunemployment unexpectedly dropped to 4.0 per cent in September from 4.2 per cent in August, despite fears of a looming recession. Market forecasts had been for a steady jobless rate of 4.2 per cent.

Japan was trapped in a deflationary spiral for years, but the return of inflation has also caused concern because it is being driven by rising import costs rather than a stronger domestic economy.

The Japanese economy shrank in the second quarter of this year and there are increasing fears that it is once again in recession, which is usually defined as two straight quarters of economic contraction.