Japanese shares ended lower on Friday amid Middle East tensions and after a Bank of Japan paper warned that gradual rate hikes amid rising raw material costs risk fueling a wage-price spiral.

The Nikkei 225 fell 0.22%, or 85.11 points, to end at 38,403.23.

Israel hit Iranian nuclear sites overnight, triggering missile and drone attacks from Tehran as the week-old air war escalated with no clear exit.

The White House said President Donald Trump will decide within two weeks on possible US involvement, facing pressure from parts of his MAGA base opposing a strike.

Meanwhile, gradual rate hikes as raw material costs rise risk fueling a wage-price spiral, the BOJ said in a research paper this week.

While Japan's pass-through from higher input costs has been milder than Europe's, second-round effects remain persistent.

In other economic news, Japan's core inflation rose to 3.7% in May, its highest since January 2023, beating the 3.6% forecast, official data showed Friday. Headline inflation climbed 3.5%.

Food prices excluding perishables jumped 7.7%, while utility costs also rose 7.7%, led by an 11.3% surge in electricity.

Among corporate movers, NTT (TYO:9432) acquired 336.8 million shares of NTT Data (TYO:9613) via a tender offer that closed June 19, boosting its stake in the IT services firm.

Sojitz (TYO:2768) invested AU$235 million (22.2 billion yen) to establish Netherlands-based Sojitz Capella, a 94%-owned energy and infrastructure unit.

SoftBank (TYO:9984) founder Masayoshi Son is exploring a $1 trillion Arizona AI and robotics hub with possible involvement from TSMC (TPE:2330), Bloomberg reported.