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Japan’s economy may see a light at the end of the tunnel, and it’s not a train

Japan's industrial production data, released on Wednesday, may have offered a light at the end of the tunnel for the long stagnant economy.

In November, industrial output rose 1.5 percent on month, just a tad below the Reuters forecast for a 1.6 percent rise, up from a flat reading in October.

But the big positive was in the details, particularly in inventories, which fell 1.5 percent on-month and 4.8 percent on-year.

Izumi Devalier, head of Japan economics at Bank of America-Merrill Lynch, told CNBC's "Squawk Box" on Wednesday that the print was generally "very positive," noting the sharp inventory drop.

"We're now down to levels we saw pretty much at the time of the VAT [value-added tax] hike. So inventories are very lean, which means that we should some pretty strong production numbers in the months ahead," she said.

As part of Japan Prime Minister Shinzo Abe's program to boost the country's long-moribund economy out of decades of deflation, dubbed Abenomics, the nation-wide consumption tax was boosted to 8 percent from 5 percent took effect in April 2014, in a move aimed at improving government finances.

But that clobbered the economy as consumers stopped spending after the hike, forcing the government to postpone a second sales tax increase, potentially until 2019.

Devalier also noted that the tax hike had a secondary effect: The weakness in the economy meant companies stalled on increasing wages, although in general, real wage growth had been strong over the past two years.

She expected that as the labor market continued to tighten – Japan suffers from an aging population, which is squeezing the size of the work force – wage growth will pick up.

But she noted that in Japan, stronger wages haven't necessarily led to more consumption.

"It didn't lead to consumption because there was a spike in the savings rate," she said. "But as we are starting to see a stabilization in consumer sentiment, I think if the economy continues to improve and wage growth firms, we'll have consumers being more comfortable spending."

There were signs of that in retail sales data, which were also released on Wednesday, showing a surprise 1.7 percent on-year jump in November, compared with a Reuters poll forecasting a 0.6 percent rise.

That could herald positives for the long stagnant economy. In the July-to-September quarter, Japan's gross domestic product (GDP) grew 1.3 percent on-year, according to revised figures released in early December.

That's a relatively tame figure after around three years of concerted policy efforts.

Hitoshi Yamada | NurPhoto | Getty Images

Abenomics was introduced in 2013. The program, which was expected to include three "arrows," began with a first arrow of massive quantitative easing from the Bank of Japan (BOJ). It was followed by plans for increased government spending. But the third arrow of structural reforms, including immigration and labor changes, has disappointed expectations.

While the BOJ has claimed Japan's economy has been booted out of a decades-long deflationary spiral, the central bank has had limited success in generating the desired levels of inflation.

On Tuesday, government data showed that Japan's core consumer price index, which includes oil products, but not volatile fresh food prices, fell for a ninth straight month in November, slipping 0.4 percent on-year.

But there were expectations that inflation could rise ahead, with oil prices increasing recently and as the recent weakening of the yen should boost import prices.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1

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