Japanese shares closed lower on Friday after Tokyo's core inflation rose to 3.6% in May, the highest in over two years, fueling expectations of further rate hikes amid stubborn food price gains.

The Nikkei 225 fell 0.91%, or 348.86 points, to end at 38,084.12.

The Tokyo CPI increase was above forecasts and the fastest pace since January 2023, marking the third straight year above the Bank of Japan's 2% target.

A gauge excluding fresh food and fuel climbed 3.3%, pointing to sticky inflation driven by surging food and service costs.

Rice prices jumped 93.2% while services inflation picked up to 2.2%.

Factory output fell 0.9% in April, but manufacturers expect a rebound in May before a decline in June.

Meanwhile, Japan's jobless rate held steady at 2.5% in April, with employment slightly down to 68.04 million and the number of unemployed rising to 1.76 million.

The job-to-applicant ratio remained at 1.26 for a second month.

On the corporate front, Shionogi (TYO:4507) said China accepted its new drug application for naldemedine, used to treat opioid-induced constipation. Already approved in multiple regions, the drug targets an unmet need in cancer care and is backed by local Phase III data.

Shin Nippon Biomedical (TYO:2395) declared a year-end dividend of 30 yen, maintaining a full-year payout of 50 yen. It forecasts the same total for the current fiscal year.

OUE (SGX:LJ3) and Tokyo Century (TYO:8439) broke ground on a 255-room Hotel Indigo at Singapore's Changi Airport, set to open in 2028.