TOKYO - "Please remain calm and stay in your seats. There are no safety problems with the plane or this flight and the turbulence will soon end."
That was the message Japanese Economics Minister Akira Amari gave to investors this week after Tokyo share prices plunged and long-term interest rates spiked. And for now, investors look likely to give the government's "Abenomics" recipe for reflating the economy the benefit of the doubt.
That said, a dose of caution is creeping in after heady gains in share prices and a sharp fall in the yen since Prime Minister Shinzo Abe took office following his Liberal Democratic Party's (LDP) big election win in December.
"I don't see the recent market moves as a sign that hopes for Abenomics are tapering off. Rather, it's a correction of what was a very rapid factoring in of expectations that things will change suddenly," said Tohru Sasaki, chief foreign exchange strategist at JP Morgan Chase Bank in Tokyo.
"Even if Abenomics does succeed in changing things around, it will certainly take time. People realised that and are correcting their positions," Sasaki said.
Tokyo's Nikkei share average has tumbled nearly 14 per cent since hitting a 5-1/2-year high on May 23. It slid 7.3 per cent that same day for its biggest one-day fall since the March 2011 earthquake and tsunami.
Still, the benchmark is up 11 per cent since April 4, when the Bank of Japan unveiled sweeping stimulus, and has risen 33 per cent so far this year.
Abe's government is set to announce a new strategy for sustainable growth and macro-economic guidelines including fiscal reform on June 14, although hopes of bold steps in areas such as deregulation are already dimming.
"Expectations for 'Abenomics' have not yet completely worn off, but investors are becoming cautious, which is one factor behind recent stock falls," said Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.
"To keep up expectations, the government must take bold and concrete measures such as corporate tax cuts, labour mobility and immigrants, but none of these are likely to be addressed in its growth strategy."
STRUCTURAL REFORM, FISCAL DISCIPLINE
With public debt already more than twice the size of the economy, policymakers also know they must show commitment to reining in that debt but are reluctant to tie their hands too tightly, especially ahead of an upper house election on July 21.
"Markets don't expect much to come out in terms of a growth strategy and fiscal reforms, at least until the upper house election is out of the way," JP Morgan Chase's Sasaki said.
"As such, we probably won't see much selling on disappointment even if they don't include anything new. But when markets are in a correction phase like now, some investors might use it as an excuse to sell to take profits," he added.
Tokyo also needs to show its commitment to structural and fiscal reform to persuade overseas trade partners that the Bank of Japan's hyper-easy monetary policy is not aimed at weakening the yen as a way to boost Japan Inc's competitiveness abroad.
The yen has fallen 16 per cent against the dollar this year, buoying shares of Japanese exporters, but has failed to make further headway after breaking 100 yen to the dollar on May 9. It last traded at 100.80 on Friday.
The International Monetary Fund said on Friday it did not see a weak yen as a problem if Japan's monetary easing was aimed at domestic goals and accompanied by fiscal and structural reforms.
Deputy BOJ Governor Hiroshi Nakaso made a similar point, telling a conference that the public should realise the central bank was not buying government debt to finance the deficit and the government must take steps toward fiscal discipline.
Disappointing reforms or a lack of fiscal reform steps such as a delay in a planned doubling of the 5 per cent sales tax by October 2015 would heighten the risk of a rise in long-term government bond yields, the IMF added.
Finance Minister Taro Aso said on Friday that he saw no chance now of postponing an initial sales tax rise to 8 per cent from April 2014.
The government will decide by October whether to go ahead with the tax hike, taking into account various economic data. Market players and voters mostly expect it to go ahead.
A sharp rise in long-term interest rates would undercut Abe's growth strategy. The 10-year JGB yield slipped 3 basis points on Friday after hitting a 13-month high of 1.0 per cent on May 23.
"People got scared when the 10-year yield hit 1 per cent last week," said Maki Shimizu, a senior strategist at Citigroup in Tokyo.