Asia-Pacific News

Japan's Abe unveils 'Third Arrow' of reforms

Abe shoots 'third arrow': What it entails

Prime Minister Shinzo Abe unveiled a package of measures on Tuesday aimed to boost Japan's long-term economic growth, from phased-in corporate tax cuts to a bigger role for women and foreign workers, but applause from investors is likely to be muted after Tokyo backpedaled on bolder reforms.

Abe took office 18 months ago pledging to end deflation and generate sustainable growth with a three-pronged strategy of monetary easing, fiscal spending and reform.

Experts say the latest installment of his so-called "Third Arrow" of long-term economic policies, most of which had been trailed in advance, is a step in the right direction, but want to see how they are fleshed out and implemented.

Read More Bank of Japan risks QE failure: Economist

Private economists surveyed by Reuters forecast that the plan could boost Japan's potential growth rate by 0.2-1.5 percentage points from its current level of around 0.5 percent. But they noted that it would take time.

"Even after the government growth strategy is announced, various legislation must be enacted and it will take time for companies to begin to act. Therefore, it will be 10 to 20 years before the potential growth rate rises," said Kenji Yumoto, vice chairman of the Japan Research Institute.

Yumoto said it was possible, but very difficult, for Japan to hit the 2 percent growth level the government says is needed to reduce its mammoth public debt.

Japanese Prime Minister, Shinzo Abe.
Tomohiro Ohsumi | Bloomberg | Getty Images

Among the steps outlined so far is a future cut in Japan's effective corporate tax rate - among the highest in the world - to below 30 percent over the next several years, and a promise to reform the $1.26 trillion Government Pension Investment Fund in ways likely to reallocate more money to the stock market.

Read MoreJapan's celibacy issue—What's the economic cost?

Abe's reform package is a welcome move for the Bank of Japan, which has called for bold government to help sustain the current recovery fueled in part by its massive monetary stimulus.

But many BOJ officials say the key now is implementation and Abe's commitment to meet words with action, so that companies feel confident enough to boost investment for the future.

BOJ Governor Haruhiko Kuroda, a former senior finance ministry bureaucrat, has also warned against cutting Japan's corporate tax rate without securing an alternative source of tax revenue, given the country's massive public debt.

In a nod to that need for balance, the tax plan will seek to offset the cuts by broadening the tax base.

But tough, key details of many steps have been left to be worked out later and several bold but politically contentious proposals were watered down or omitted.

By dribbling out key elements of the package in recent weeks, the government hopes to avoid the disappointment that led to a sharp drop in Tokyo share prices when Abe announced the first installment of his "Third Arrow" last June.

Earlier in the day, Abe urged the nation's business leaders to do more to boost the role of working women, a key plank in the growth strategy and seen as vital to address the shrinking workforce in one of the world's most rapidly ageing societies.

In a meeting with business executives, Abe urged companies to set targets for promoting female workers to senior jobs and disclose information on progress in annual earnings reports.

Abe's remarks came one day after a Tokyo assembly member from his ruling Liberal Democratic Party (LDP) had to apologize for heckling a female local lawmaker with sexist comments.

Read MoreDoes Japan's current account spell danger for the yen?

Also included in the package are steps to raise the number of highly skilled foreign workers and expand a controversial foreign trainee program; boost productivity through a "robotic revolution"; and target the healthcare sector for growth.

Early bold proposals on agriculture reform look to have been watered down due to opposition from the powerful farm lobby, while the government has gone out of its way to say moves to increase foreign workers are not an "immigration" policy.

Discussions on easing labor market rigidities to boost productivity looked set to yield a plan to end paid overtime for workers earning the equivalent of at least $100,000 per year - only about 4 percent of the workforce. The touchy question of whether to make it easier to fire workers is likely to be left for later debate.

"Abe's 'Third Arrow' growth strategy seems to me like a dart not an arrow," said Naoki Iizuka, an economist at Citigroup Global Markets Japan. "I hope he will come up with bolder plans ahead."

Follow us on Twitter: @CNBCWorld