European stock markets on Friday extended recent gains but Tokyo tanked with focus firmly on central bank activity.

Traders are increasingly expecting the US Federal Reserve to cut interest rates in September as inflation retreats.

At the same time, speculation abounds that the Bank of Japan has intervened in foreign exchange markets to boost the yen.

A smaller-than-expected US print on the June consumer price index Thursday ramped up bets on easing borrowing costs on the horizon in the world's biggest economy.

Analysts said the softer US inflation provided Japanese authorities the perfect opportunity to step into forex markets to provide support to the yen, which surged against the dollar Thursday.

"The pronounced move in the yen appears to be coming on the back of combined impact from US inflation and intervention by Japanese authorities," Charu Chanana at Saxo Markets told AFP.

"There seems to be a new playbook for Japanese interventions, coming in along with supportive fundamentals, making the strength in yen somewhat more durable."

While speculation swirled about official involvement, Japan's top currency diplomat Masato Kanda told reporters late Thursday that authorities were "not in a position to comment on whether they intervened in the market", according to public broadcaster NHK.

"Objectively speaking, there have been quite rapid fluctuations, which has affected people's lives."

There was little major reaction to data showing Chinese exports surged more than expected last month but imports confounded estimates to increase and fell.

The figures came ahead of next week's Third Plenum, a key meeting of leaders in Beijing that traders hope will see announcements aimed at kick-starting lacklustre economic growth.

The gathering will kick off the same day China is expected to release its gross domestic product figures for the second quarter.

"The success of the Third Plenum hinges on lifting household spending," said Harry Murphy Cruise and Sarah Tan at Moody's Analytics in a note.

"And that means reforms targeting housing, labour markets and tax. To be clear, policy changes are likely to be modest because of budget constraints and fears of reinflating a property bubble."

- Key figures around 1100 GMT -

  • London - FTSE 100: UP 0.3 percent at 8,248.47 points
  • Paris - CAC 40: UP 0.7 percent at 7,681.66
  • Frankfurt - DAX: UP 0.4 percent at 18,612.73
  • EURO STOXX 50: UP 0.6 percent at 5,006.28
  • Tokyo - Nikkei 225: DOWN 2.5 percent at 41,190.68 (close)
  • Hong Kong - Hang Seng Index: UP 2.6 percent at 18,293.38 (close)
  • Shanghai - Composite: FLAT at 2,971.30 (close)
  • New York - Dow: UP 0.1 percent at 39,753.75 (close)
  • Dollar/yen: UP at 159.13 yen from 158.86 yen on Thursday
  • Euro/dollar: UP at $1.0891 from $1.0870
  • Pound/dollar: UP at $1.2959 from $1.2912
  • Euro/pound: DOWN at 84.01 pence from 84.15 pence
  • Brent North Sea Crude: UP 0.6 percent at $85.91 per barrel
  • West Texas Intermediate: UP 0.9 percent at $83.34 per barrel