Poor Japanese manufacturing data on Friday gave new Prime Minister Shinzo Abe more ammunition to push for big spending and easy money to salvage the world's third largest economy from decades of deflation and its fourth recession since 2000.
Japanese voters and the financial markets have welcomed the Abe government's aggressive stance on pumping cash into the economy, pushing the benchmark Nikkei share average on Friday to its highest level since the March 2011 tsunami, despite the worse than expected drop in factory output.
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Opinion polls published by major newspapers on Friday showed half to two-thirds of the public supported Abe's conservative government, with the stagnant economy the top priority.
Top officials of the new government, sworn in just two days ago after a landslide election victory, say Abe's administration is under pressure to achieve quick results.
"(Public support) will drop if speculation mounts that we are unable to deliver," Akira Amari, the minister in charge of reviving the economy, told a news conference after a Friday morning cabinet meeting.
But many economists warn Abe's emphasis on stimulus, rather than underlying structural reforms to boost competitiveness, may have only short-term effects and could worsen bloated public debt, the worst among the industrial nations.
Pressure to Perform
The government is keeping up pressure on the Bank of Japan (BOJ) to step up its monetary stimulus, even after it loosened policy in December for the third time in four months.
Finance Minister Taro Aso said he was paid a courtesy visit by BOJ Governor Masaaki Shirakawa on Friday in which the two agreed to hold talks on issues including coordinating policy.
Abe has threatened to change the law which guarantees the central bank's independence if it does not pursue more aggressive easing.
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Potentially adding more pressure on the BOJ was Japanese factory output data on Friday that fell a steeper than expected 1.7 percent in November, more than triple the median market forecast for a 0.5 percent drop. That followed a 1.6 percent gain in October, the first rise in four months.
Japanese manufacturing activity also put in a bleak performance in Friday's Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) for December, which declined at its fastest pace in more than three years.
Japan's economy has slipped into a mild recession, hurt by weak global demand and slumping sales to China after a diplomatic row over disputed isles.
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Analysts expect growth to pick up early next year, although any recovery will likely be slow and modest.
The industrial output data from the Ministry of Economy, Trade and Industry included a survey showing that manufacturers expect output to rise 6.7 percent in December and increase 2.4 percent in January.
Pretext to Push Stimulus
"Today's data confirmed that the economy remained on a downward trend and this could be a reason for the government to adopt an expansionary fiscal policy," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"But if you look at data closely, there are also signs the economy will probably be bottoming out, so the data could simply offer the government a pretext to use its stimulus plan to support the recovery."
Under pressure from Abe, the central bank has also signalled it may set a higher inflation target at its January 21-22 meeting than the current 1 percent goal, although market participants doubt it will have the means to achieve it.
Separate data released on Friday showed Japan's core consumer prices, which exclude volatile fresh food prices, edged down 0.1 percent in November from a year earlier, in line with the median market forecast.
The markets have been focusing on the prospects for further monetary easing and its impact on the yen, which has backed off from its long-running strength against the dollar and slipped to its weakest in more than two years. The yen dropped to 86.64 to the dollar on Friday, its lowest since August 2010.
This has helped to fuel a rally in the shares of Japanese exporters, which were hurt by the yen's strength. The Nikkei benchmark has risen more than 20 percent since mid-November and is on track for its best year since 2005.
Bond yields have also perked up after being depressed, with the benchmark 10-year Japanese government bond yield capped at 0.8 percent since the start of the quarter.