Japan's domestic demand still lackluster

Yesterday's data showed that retail sales rose notably in Oct (1.1% MoM sa). But the household expenditures index posted a further decline during the same month (-0.7%). The latter is a better indicator measuring domestic consumption as it excludes foreign tourists' spending and captures spending on both goods and services. Thanks to the improvement in external demand, industrial production increased 1.4% in Oct. The leading indicators suggest that the rise will come to a halt in the next couple of months and production level will be roughly flat in Nov-Dec. 

Economic contraction is coming to an end and real GDP will grow about 1% (QoQ saar) in 4Q. But this will be insufficient to offset the contractions in the past two quarters and the output gap will stay negative. A stronger recovery is needed to eliminate the spare capacity, encourage companies to raise wages and help the central bank to achieve the goal of reflation. Downside risks still dominate, given an uncertain global economic outlook, fragile confidence, and fading impact of Abenomics.