The world's second-largest economy emerged from recession in the second quarter, but persistent declines in prices and wages and ballooning public debt threatening Japan's credit rating have fueled 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. That's what happened with the election manifesto in the end.
SOARING PUBLIC DEBT
The document did not discuss any plans to rein in public debt, expected to soar above 200 percent of gross domestic product next year.
Leading ratings firms have warned of possible downgrades of Japanese government debt.
A Standard & Poor's analyst told Reuters its AA credit rating on Japan could be in danger if policy initiatives fail to stabilize and then gradually reduce the debt burden.
Moody's analyst struck a similar note, saying Japan's rating would largely hinge on the government's ability to stabilize its finances.
Last month ratings agency Fitch also warned that a marked increase in new borrowing might trigger a credit downgrade.
Japan's 77-year-old finance minister Hirohisa Fujii, who was admitted to hospital for tests on Monday following weeks of wrangling over how the government can balance policy pledges with the need to rein in public debt in next year's budget, told reporters on Wednesday he was worn out.
Frankly speaking, compiling the budget was a heavy duty, Fujii said, adding he was going back to hospital for more tests.
Asked if he will be fit enough to keep his job, he said he would follow doctors' advice.
Keiko Onogi, a senior JGB strategist at Daiwa Securities SMBC, said: It's difficult to gauge the finance minister's state of health at this stage but it's hard to imagine it becoming a trading factor. The finance ministry's challenges are extensive -- it has to deal with ever increasing debt -- and 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 percent, which would imply average inflation of about 1 percent.
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 percent and real average growth of about 1 percent.
DETAILS NEXT JUNE
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 government's longer-term fiscal plans are due around May.
The strategy, in theory, could nudge up JGB yields as it aims to overcome deflation. But in reality it doesn't mention any specifics regarding how to overcome deflation, so it's unlikely to affect the market, said Katsutoshi Inadome, a fixed-income strategist at Mitsubishi UFJ Securities in Tokyo.
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 fulfill campaign pledges to boost the economy's growth potential.
Doubts about Prime Minister Yukio Hatoyama's ability to act decisively on the economy and diplomacy have eroded support for this government to below 50 percent from initial highs above 70 percent and the growth blueprint aimed to dispel such concerns.
What we need the most now is to show the public a vision for Japan's future ... and a political leadership that can move forward policies toward that goal, the document said.
In contrast with earlier statements in which the government painted a gloomy picture of the economy to prod the central bank to do more to rev up growth, Finance Minister Fujii struck a more optimistic note after the growth plan's unveiling.
He said he was convinced the economy would grow next year and there was no threat of a double-dip recession. The economy will surely grow ... Consumption will expand and so will housing investment. Capital spending will recover through healthy exports, Fujii told a news conference.
Japan's manufacturing survey for December appeared to support such optimism, showing export orders at their highest level since July 2004. Many economists, however, expect growth to be sluggish at best as companies continue to cut wages to slash cost and remain competitive against foreign rivals.
The blueprint included an aim to establish a Free Trade Area of the Asia-Pacific in 2020 and also contribute to a goal of doubling Asian incomes by 2020.
Hideyuki Ishiguro, a strategist at Okasan Securities, said: The overall vision isn't bad but I think the most important thing may be the emphasis on Asia. The companies that are really doing well have a lot of competitiveness there.
(Editing by Tomasz Janowski and Michael Watson)