Latest Data Help Allay Doubts Over Japan's Policies

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If there have been doubts about the effectiveness of Japan's radical economic policies, widely known as "Abenomics," Friday's flurry of data should help put some of the disquiet to rest, analysts told CNBC.

The country released a slew of data from inflation to industrial output and retail sales, which largely painted an improving picture of the world's third largest economy.

Core consumer prices stopped a seven-month slide in May, after the consumer price index (CPI) came in flat compared to a year ago, meeting forecasts.

The Tokyo core CPI meanwhile, which is seen as a leading indicator on the economy and released a month in advance of overall Japan data, rose 0.2 percent in June from a year earlier.

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Retail sales for May also backed strength on the consumer front, rising 0.8 percent year on year, also snapping a losing streak that lasted four months.

The standout figures were the industrial output numbers, which rose 2 percent in May and up for the fourth month in a row, and are seen gaining momentum in the coming months, according to the Ministry of Economy, Trade and Industry survey.

"The data we saw this morning [Friday] overall were very positive numbers [and show] the effectiveness of the Bank of Japan [BOJ] monetary policy and 'Abenomics'," said Junko Nishioka chief Japan economist at RBS Securities, Japan .

"The CPI finally got out of negative territory. There's still a long way to go to achieve 2 percent inflation target, but as long as the Japan economy continues to expand and weaken yen maintained by Bank of Japan policy, CPI will likely gain momentum in the second half of this year," she said.

Prime Minister Shinzo Abe's dramatic policies to revive the economy, based on his "three arrows" approach of monetary stimulus, fiscal measure and long-term structural reforms, have created a buzz around Japanese markets since late last year.

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The measures triggered a rapid surge in the dollar-yen which breached the 100-handle at one point, and prompted a breath-taking run-up in Japanese stocks which saw the Nikkei jump 80 percent at the peak of its rally in May from mid-November.

However, skepticism over the sustainability of Abe's policies crept in last month, and together with jitters over the early withdrawal of the Federal Reserve's massive bond-buying program, sent markets into a tailspin. The Nikkei has fallen 14 percent since the sell-off began in May, while the dollar-yen saw a shakeout which brought it back to the current 98.5 levels.

Analysts said Friday's robust data show the momentum of Japan's economic recovery is intact and should help alleviate some anxiety in the markets.

"Despite the negative downside risks mounting in overseas economies, Japan is still on the right track," said Nishioka, adding that the yen, which she expects to stay weak, and a change in mindset of consumers, should continue to support the economy.

"People increasingly expect rise of price conditions – that stimulates domestic demand at this moment. Even though we haven't seen increase in nominal wages, people's mindsets are changing to stimulate to spend money into this moment rather than in the future."

Up Next, Tankan

The latest batch of data should bode well for the closely-watched quarterly Tankan survey by the Bank of Japan (BOJ), which will be released on Monday, analysts said.

The survey of business sentiment will be the first to be issued since the BOJ adopted unprecedented monetary easing in April.

"Strong industrial production numbers mean manufacturers are feeling better about their sale prospects, so I do think that could imply a positive surprise for the Tankan," said Takuji Okubo, chief economist, Japan Macro Advisors.

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According to George Dowd, senior director at brokerage Newedge, the Tankan should show improving business sentiment, but more importantly, investors should not fixate on data points, as long as the overall picture points to a healthier Japanese economy.

"As long as things are moving the right way, every now and then you're going to have individual components not really living up to expectations but hopefully, you can start to get them all moving the same way soon," Dowd said.

"It's a big ship and it's not going to turn on a dime so it's going to take some time for people to realize that," he added.

-By CNBC's Li Anne Wong. Follow her on Twitter at@LiAnneCNBC