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Japan Approves Growth Steps, Promises to Do More After Polls

Thursday, 13 Jun 2013 | 9:11 PM ET
Japanese Prime Minister Shinzo Abe
Getty Images
Japanese Prime Minister Shinzo Abe

Japan's cabinet rubber-stamped a set of measures on Friday to boost economic growth that so far have failed to impress markets and made Prime Minister Shinzo Abe promise to take more steps after next month's upper house elections.

The growth strategy is a part of Abe's economic revival plan that also includes hyper-easy monetary policy and big government spending and has been unveiled in batches over past few months to lukewarm reception of investors and commentators.

The proposed pro-growth measures include creation of special economic zones, incentives to boost private investment and participation of women in the workforce as well as deregulation steps in some sectors.

But disappointment over the absence of such steps as corporate tax cuts, labor market and farming sector liberalization accelerated the retreat in Japanese stocks, which dived into a bearish territory this week.

(Read More: A Question Mark on Japan: Pimco CEO)

In response, the government included a proposal to offer tax breaks to companies investing in new equipment and facilities.

"The growth strategy decided today will be the starting point," Abe said in a video message.

"I will ensure political stability and in the autumn I will launch the second round of the Growth Strategy."

(Read More: What Japan Can Teach the Fed About QE Addiction)

The cabinet approval of a broad array of steps and targets hammered out by government and expert panels comes at a critical point in Abe's six-month push to pull the world's third-largest economy out of deflation and bring back sustained growth.

The economy is picking up pace, having expanded at an annualized 4.1 percent rate in the first quarter, with help of improved global demand, relief for exporters from weaker yen and improved consumer and business confidence brought by Bank of Japan's unprecedented burst of monetary stimulus.

But at the same time the yen clawed back some of its losses to trade at its highest levels in 10 weeks on Thursday , while stocks are more than 20 percent below 5-1/2 peak hit on May 23.

Such market reversal threatens to undermine a key premise of Abe's plan that the feel-good effect of "Abenomics" will translate over time into sustained growth in consumption, output and incomes.

(Read More: Yen Surge as Safe-Haven Bid Back in Play)

Keen to regain the momentum, Abe has promised to deliver a second batch of reforms when the parliament reconvenes after a July 21 upper house election.

Surveys suggest Abe's party, which dominates the lower house, but lacks a majority in the upper chamber, should win control of both houses.

Some economists say it is natural for the government to play it safe and avoid the most controversial steps ahead of the elections, adding that critics should give Abe more time.

"It is no surprise that the government could not come up with big measures in the growth strategy at this stage," said Yasuo Yamamoto, senior economist at Mizuho Research Institute.

(Read More: Is It Game Over for Japanese Equities?)

"It will be difficult to ease regulations in a short timeframe as those who are against such steps have to be convinced. The important thing is that the government keeps sending messages it is working and pushing forward with reforms."

Alongside its growth plan, the government also confirmed its fiscal targets of halving the primary deficit - the budget excluding new bond sales and debt servicing - by March 2016 and returning to surplus by March 2021.

A government official said details on how to achieve those targets will be laid out probably in August in a medium-term fiscal plan, which could include new ceilings on bond issuance and spending, and budget guidelines for the next fiscal year.

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