The slowdown in recurring profits reflects rising material costs in manufacturing and higher personnel costs in non-manufacturing.
Consecutive gains of core prices provide strong evidence that Japan is finally shaking off a long bout of deflation. It won't be a surprise if the Bank of Japan makes a policy turn even before April.
Japan's consumer spending is pretty firm, and it's expected to pick up momentum further in the next fiscal year. So far, the growth in consumption hasn't caught up to the pace of economic growth, but we expect it will gradually play a role as a locomotive for economic expansion.
The shrinking trade balance isn't a bad thing because it's partly a result of strong domestic demand. Given that domestic demand is driving the economy, the rise in oil prices alone isn't enough to derail growth.
The Bank of Japan has already laid out a map on how it will alter its policy framework, and financial markets are factoring that in. Opposition from the government and politicians to the central bank will probably continue at least through the end of March.
Domestic demand is clearly the driving force. With strong capital spending plans and signs of rising bonuses, there's a good chance that the economy will grow more than an annualized 2 percent in the fourth quarter.
I think the biggest issue from this downgrade will be trust in Moody's as a ratings agency.
The rises in import prices will likely speed up the process of companies' passing on such rises to domestic prices.
An economic improvement is spreading through all of Japan. We expect Japan's fourth quarter GDP to show a pretty good performance.
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