TOKYO Japan raised its view of the economy for the first time in eight months on Wednesday as private consumption held firm and business sentiment improved, in a sign that Prime Minister Shinzo Abe's policy of easy money and big spending, dubbed "Abenomics", has begun taking effect.
Improvement in exports and recently compiled economic stimulus steps will likely put the economy back on a recovery path, but a slowdown in overseas economies remains a risk factor, the government said in its monthly economic report.
Abe, who led his Liberal Democratic Party to a landslide election victory in December, has called for aggressive monetary easing and heavy fiscal spending to beat persistent deflation, helping to drive down the yen and boosting share prices
The government also said it expects the Bank of Japan (BOJ) to take bold steps to meet a 2 percent inflation goal that the government agreed with the central bank on Tuesday as part of a bold push to escape nagging deflation and to revive the economy.
"The economy is weak, but signs of bottoming out can be seen in some areas," the report said.
That marked an upgrade from last month, when the government said the outlook was weakening due to a slowdown in overseas economies.
Abe's cabinet approved a 10.3 trillion yen ($116.3 billion) stimulus package this month, while the BOJ, in its most determined effort yet to end years of economic stagnation, on Tuesday decided to switch to an open-ended commitment to buying assets next year and double its inflation target to 2 percent.
"(The government) expects the Bank of Japan to promote bold monetary easing so that the price stability target will be achieved as soon as possible," the monthly report said.
Japanese economics minister Akira Amari, talking to reporters after the approval of the report by the cabinet, said the improved outlook reflected the positive impact a softer yen and firmer stock prices were exerting on corporate sentiment.
Hiroaki Muto, senior economist at Sumitomo Mitsui Asset management, agreed.
"The yen has depreciated by about 10 percent (against the dollar) thanks to "Abenomics", and expectations (for economic recovery) are running high," Muto said.
"Higher expectations aside, the yen's softer trend will have an impact on the real economy. That's a major factor behind the upward revision."
SOLID CONSUMER SPENDING
In the monthly report, the government raised its view on private consumption for the second month in a row, saying consumer spending is holding firm.
"Auto sales bottomed in October and were on the rise in November and December. Car production is recovering as well. Private consumption is showing signs of bottoming out," a Cabinet Office official in charge of compiling the report said.
"Corporate leaders' views on business conditions are recovering against the backdrop of a recent correction to the yen's appreciation and gains in share prices," he said.
The risk of overseas developments negatively affecting the Japanese economy has diminished, he added, as the U.S. government has averted triggering automatic spending cuts and tax hikes known as the "fiscal cliff", and Japan appeared to be past the worst of its diplomatic row with China.
Sino-Japanese relations deteriorated sharply after the Japanese government in September bought disputed East China Sea islets, known as the Senkaku in Japan and the Diaoyu in China, from a private Japanese owner, triggering violent protests across China and a boycott of Japanese goods.
Although Asia's two biggest economies are still sending patrol ships to waters near the islands, raising worries that an unintended collision could escalate into a broader clash, anti-Japanese demonstrations have subsided.
Japanese automakers including Toyota Motor Corp (7203.T) and Nissan Motor Co Ltd (7201.T) saw a slow recovery of sales in China in December as the bruising effects of the territorial spat waned.
To keep the recovery trend going, analysts said, the government needs to tackle such tasks as deregulation and possible participation in the U.S.-led Trans-Pacific Partnership (TPP) free trade pact.
Businesses want Japan to join the pact so that Japanese exporters can better compete with overseas rivals, but politically powerful agricultural lobbies oppose the participation for fear of the influx of overseas farm products.
"What's important is how much headway the government will be making on these fronts." Sumitomo Mitsui's Muto said, noting that government could be wary of taking measures that could impact voter sentiment ahead of elections for the upper house set for July.
($1 = 88.5400 Japanese yen)
(Editing by Edmund Klamann and Simon Cameron-Moore)