The worlds second-largest economy emerged from recession in the second quarter, but persistent declines in prices and wages and ballooning public debt threatening Japans credit rating have fuelled doubts whether the export-led recovery can be sustained.
The government said in its 30-page growth blueprint it would work with the Bank of Japan to overcome deflation as early as possible, but analysts said markets wanted to see how the authorities planned to achieve that.
What we have at the moment is just a blueprint, a roadmap. It looks good on paper but we have to wait for details and how do they plan to implement it, said Mitul Kotecha, global head of forex strategy at Calyon in Hong Kong.
He said the fact that there was no detailed plan for tackling deflation was a matter of concern. Unless markets see some concrete steps being taken in that direction they will remain unconvinced about the resolve.
Political commentator Minoru Morita called the strategy a distraction, saying: I think it will calm some of the criticism of the government, but it will at the same time spark unease. People may think they are promising things they have no intention of delivering. Thats what happened with the election manifesto in the end.
The document did not discuss any plans to rein in public debt, expected to soar above 200% of gross domestic product next year. Leading ratings firms have warned of possible downgrades of Japanese government debt.
A Standard & Poors analyst told Reuters its AA credit rating on Japan could be in danger if policy initiatives fail to stabilise and then gradually reduce the debt burden.
The finance ministrys challenges are extensiveit has to deal with ever increasing debtand the challenge remains the same no matter who is at the helm.
The growth strategy, which outlined key targets and policy proposals for the 10 years to 2020/21, talks about nominal economic growth of more than 3%, which would imply average inflation of about 1%.
That is an ambitious target for a Japan that has lived with falling prices for much of the past decade and recorded an average annual nominal contraction in economic output of 0.2% and real average growth of about 1%. The government identified industries such as environment-friendly technologies, health and tourism as potential growth areas and a source of millions of new jobs.
It seeks to create 2.8 million jobs in the health sector and 1.4 million related to the environment and energy.
But details such as sources of financing, tax incentives and timetables will be announced only in June 2010, while the governments longer-term fiscal plans are due around May.
The Democratic Party-led government, in power since September, has struggled to convince markets that it has the will and expertise to get public finances under control and fulfil campaign pledges to boost the economys growth potential.Doubts about Prime Minister Yukio Hatoyamas ability to act decisively on the economy and diplomacy have eroded support for this government to below 50% from initial highs above 70% and the growth blueprint aimed to dispel such concerns.