TOKYO A small rise in Japanese exports, improving business confidence and surging investment flows demonstrated early successes for Prime Minister Shinzo Abe's radical pro-growth strategy, but firms have yet to see signs of a sustained boost to economic activity.
Abe's push for aggressive fiscal and monetary policies to shock the world's third-largest economy back into life after two decades of stagnation has driven the stock market up and the yen down since November.
The shift in gears climaxed with the Bank of Japan's $1.4 trillion stimulus plan announced on April 4 to virtually double the monetary base by the end of 2014.
Data on Thursday showed exports rose 1.1 percent in March from a year earlier, sentiment among manufacturers rose for a fifth straight month in April, and foreign investors bought a record amount of Japanese stocks last week as Abe's policy agenda, dubbed Abenomics, underpinned optimism for a recovery.
However, the data also showed a weaker yen is ramping up import bills, with Japan posting a record fiscal-year trade deficit of 8.17 trillion yen ($83.7 billion), and sentiment remains negative among manufacturers with many yet to see sizeable increases in orders or demand.
"The outlook is seen brightening as the yen has weakened, but it takes time before it leads to actual demand and orders," an electric machinery firm said in the Reuters Tankan poll, which measures sentiment among manufacturers.
WAITING FOR ORDERS
Since mid-November, the stock market has surged more than 50 percent and the yen has fallen more than 20 percent against the dollar.
That has certainly attracted the interest of foreign investors -- they bought a record 1.57 trillion yen ($16.1 billion) of Japanese stocks in the week to April 13, and bought 8.22 trillion since mid-November. Japanese investors, capitalizing on the fall in the yen, are also bringing back funds from overseas.
Akira Inoue, head of global business development at Sumitomo Mitsui Trust Bank's global fiduciary business department, said until recently foreign institutional investors had no interest in the Japanese market.
"Even after Japanese stocks' rally began late last year, many took a wait-and-see attitude. But the situation changed in March," Inoue said.
Business confidence has improved through Abe's first months in office, and the Reuters Tankan showed manufacturers' sentiment rose seven points to minus 4 in April. Further, firms expect it to turn positive in coming months.
However, they also say the real economy impact of Abenomics has been limited so far.
"The Reuters Tankan underlines rising expectations among Japanese firms for a brighter outlook, although the real economy is lagging behind those expectations," said Takeshi Minami, chief economist at Norinchukin Research Institute.
That is not unexpected -- it takes time for a weaker yen to boost exports and for the wealth effects of rising markets to flow through -- but the risk is if activity does not pick up, confidence in Abe and the economy could falter.
Another risk is that while policymakers can drive the yen lower to give a price advantage to Japan's exporters, they cannot control demand elsewhere.
Uncertainty about China's economy, Europe's ongoing troubles and a slow recovery in the United States all raise doubts about how much export demand can increase, whatever the yen's value.
"The broad picture remains intact as the weaker yen is having more of an impact on boosting imports than exports, while the recovery in the world economy, particularly China, is tepid," said Minami.
($1 = 97.5850 Japanese yen)
(Additional reporting by Dominic Lau; Writing by John Mair; Editing by Simon Cameron-Moore)