Mumbai: Japan, the world's second-largest economy, reported zero inflation in January with core consumer prices, which exclude fresh food, remaining unchanged from a year earlier.

Consumer prices excluding food and energy fell 0.2 per cent, against a 0.3 per cent decline a month earlier, the government said. Core prices in Tokyo were unchanged in February, compared with a 0.2 per cent gain in January.

It is the first time prices failed to rise since May 2006, and followed a 0.1 per cent gain in December, data released by the statistics bureau in Tokyo revealed.

As prices declined, wages also fell the most in more than two years, a separate report showed, raising the prospect of further slump in prices and higher interest rates, underscoring the Japan's economic dilemma.

Japan raised interest rates for the second time in six years last week and Bank of Japan governor Toshihiko Fukui said further increases will be gradual. BoJ, however, is unlikely to raise rates as long as CPI is negative, analysts said, adding that inflation is unlikely to pick up without a rise in wages.

Wages slumped 1.4 per cent in January, the biggest drop since June 2004, the labour ministry said.

Prices started falling in Japan in the late 1990s with a build-up in production capacity, huge accumulated debt and surplus workers. Deflation eroded corporate profits, forcing companies to cut wages and fire workers, weakening consumer spending and economic growth.

Data released by the statistics bureau, however, showed signs of a revival in consumption. Household spending rose for the first time in 13 months and the unemployment rate held at an eight-year low of four per cent.

Japan's economy also showed the biggest expansion in January despite flat prices and a slump in wages.

Household spending unexpectedly rose 0.6 per cent in January against a 2.4 per cent decline in the previous year period.

The Bank of Japan raised its key interest rate last week for the second time since July, to 0.5 per cent, citing robust growth. The central bank has said it will adjust rates gradually from here, and do so in line with price fluctuations.

Japan's key interest rate still remains the lowest among major economies against the US Federal Reserve's 5.25 per cent and the European Central Bank's 3.5 per cent.