TOKYO, JAPAN - Japan saw the fastest rate of inflation in almost a decade in December amid soaring oil prices, data showed Friday, but the central bank said it will hold low interest rates amid global uncertainty.

The world's second largest economy has struggled for the past decade to put an end to deflation, which drags down growth by giving companies and consumers incentive to wait to spend their money.

Japan's core consumer price index (CPI), which excludes volatile prices of perishable food, rose 0.8 percent last month from a year earlier, the third consecutive monthly gain, the government said.

But the government and analysts said the figure was hardly good news for

Japan as the spike in prices was largely due to volatile global prices in oil and raw materials.

"A rise in prices that are close to people's lives will have a negative impact on consumers when salaries are not rising," Hiroko Ota, the economic and fiscal policy minister, told reporters.

Ota stressed that the December gain did not signal an end to deflation, noting that prices fell 0.1 percent when excluding energy and food.

"We still can't say we are taking a big step forward to exiting deflation," she said.

For the whole of 2007, core consumer prices were unchanged from the previous year.

January prices in Tokyo, a key sign of nationwide trends, rose 0.4 percent from a year earlier for a third consecutive month of growth.

Month-on-month, the December nationwide index was up 0.3 percent but the Tokyo price was down 0.4 percent, the first fall in six months.

The Bank of Japan until 2006 maintained an unusual policy of keeping interest rates effectively at zero in a bid to defeat deflation. The current 0.50 percent remains the lowest among major economies.

Some lawmakers have pushed the central bank to slash the rate back down amid recent global market turmoil and recession fears caused by spiralling mortgage defaults among US subprime, or high-risk, customers.

The US Federal Reserve on Tuesday took the unprecedented emergency step of cutting its benchmark rate by three-quarters of a point to 3.50 percent. The Fed is widely expected to slash it again at its regular meeting next week.

But Bank of Japan governor Toshihiko Fukui, appearing in parliament, signalled he was not eager to move on interest rates and said there was a 'high probability' that Japan's economy will continue expanding. Central banks' job is to "select appropriate policies by analysing outlooks of each country's economy and prices even when there is a growing sense of crisis," Fukui said.

Analysts also played down the chance of an immediate interest rate cut by the Bank of Japan (BoJ).

"On top of the subprime loan market problem and uncertainties about the US economy, the latest core CPI data do not support a rate increase by the BoJ - it gives them another cause for concern," said Kyohei Morita, a senior economist at Nomura Securities Financial and Economic Research Center.

Prime Minister Yasuo Fukuda meanwhile stressed the need for international cooperation in tackling the stock turmoil.

"We should not make light of the recent sharp decline in stocks," Fukuda told parliament.

"Can Japan alone handle the case? I think it's most effective to work together with other countries," the premier said. "We will consider our measures by coordinating with other countries."

Japan is to host a meeting of finance chiefs of the Group of Seven industrialised nations on February 9. --AFP