Japan confident over 'third arrow' growth package

TOKYO - The Japanese government shrugged off stock market gyrations Thursday, saying a raft of reforms including tax breaks for firms wanting to invest would boost the economy.

As the Nikkei 225 began another precipitous drop that saw it close the day 6.35 per cent lower than it started, Chief Cabinet Secretary Yoshihide Suga said the world's third largest economy remained on a path to recovery.

"Our nation's economy is steadily picking up," he told a briefing in the morning.

"The real economy and leading indicators are improving. We want to continue to manage the economy with confidence," he said.

The cabinet of Prime Minister Shinzo Abe will Friday endorse the so-called "third-arrow" of his programme of growth and reforms, in a scheme dubbed "Abenomics".

The two earlier "arrows" came in the form of aggressive monetary easing and massive public spending aimed at ending years of vigour-sapping deflation.

The draft proposals place emphasis on medium to long-term goals that Abe hopes will generate two-per cent real GDP growth annually over the next decade, far outstripping the rate in the last ten years.

They promise major investment tax breaks, the creation of special economic zones and boosting the employment of women and the elderly, among a wide-range of other initiatives.

They also aim to shift labour to growth sectors, increase exports of infrastructure, and to enhance medical services.

The cabinet will officially approve the measures on Friday, as the government prepares for an important upper house election in mid July.

Some analysts have criticised the growth policies as lacking detail, a viewpoint some say is borne-out by the wild fluctuations on the Tokyo stock exchange in recent weeks, as a fast-running bull market has become a bear.

But participants say worries over a quick end to the huge monetary easing programme in the United States is the main driver, pushing the yen higher as players buy the currency for its safe haven status.

Japanese economists welcomed Abe's new moves, saying they signal the conservative premier's continued commitment to an economic agenda.

"The investment tax break is significant. The government is showing its resolve to stick to its economic policies," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

Recent plunges of Tokyo stocks are largely a reaction to inflated hopes for the earlier central bank monetary easing, and less to do with the growth measures, he said.

But the market's wild volatility could serve as a reminder for the Abe cabinet to keep its eyes on the economy even after the election, in which the ruling bloc is expected to perform well, Kumano said.

Hiromichi Shirakawa, an economist at Credit Suisse, said the market's big swings may have pushed the government to firm up plans for tax breaks.

"We positively view the government's announcement it will be offering dramatic investment tax breaks," he said.

Private investments could boost the economy in the medium to long-term and should moderate negative impacts from the low birth rate and ageing population, Shirakawa added.

But others said Abe's package repeats failed promises of past governments.

BNP Paribas, in a note to clients, said Abe's two-per cent growth target was unrealistic and ignores economic realities like Japan's shrinking workforce.

"In setting the target..., one has to wonder if the Abe administration even has the slightest idea of the economy's performance these past two decades," it said.

"When we consider the growth rates of other countries, it becomes clear that Abe's growth target is a very high hurdle."