Japan unemployment hits record

The politically sensitive jobless rate also hit a record high 5.7 percent ahead of Sunday's election, which the opposition Democratic Party looks set to win, reinforcing the view that the BOJ will keep interest rates low to support a fragile economic recovery.

"The BOJ was a little bit in denial in the first half of this year, but the CPI data may have them rethink their approach to policy," said Simon Wong, regional economist at Standard Chartered in Hong Kong.

"There's no more talk of exit strategy. There may also be pressure to be more aggressive by saying they're committed to current policy until prices turn positive."

The central bank, however, is unlikely to revert to full-blown quantitative easing and flood the banking system with excess cash as long as price falls narrow in the months ahead.

Core consumer prices, which excludes volatile fresh food prices but includes oil costs, fell 2.2 percent in the year to July, matching a median market forecast and renewing a record for the third straight month, data showed on Friday.

In a sign deflation is becoming more pervasive, the so-called core-core consumer price index, which strips out food and energy costs, marked its biggest annual fall in seven years.

While price falls will moderate when the base effect of last summer's spike in energy prices fade later this year, weak domestic demand is expected to keep deflationary pressure alive.

The 0.9 percent annual fall in core-core CPI, which is similar to the core index used in other developed countries, was the biggest drop since July 2002 and was the fifth straight month the pace of decline accelerated.

Core consumer prices for Tokyo, available a month before the nationwide data, fell a record 1.9 percent in August from a year earlier, roughly matching market forecasts.

The yen eased slightly to 93.61 against the dollar from about 93.56 before the data.