Uncertainties are deepening about the course of the economy ahead of the consumption tax hike in April. The recovery driven by the large fiscal stimulus and aggressive monetary easing since Prime Minister Shinzo Abe took office in December 2012 appears to be losing steam.

Abe needs to flesh out the “third arrow” of his economic revival strategy so that the uptrend can survive the expected dip following the first consumption tax hike in 17 years.

Growth of Japan’s gross domestic product for the October-December period has been revised downward to an annualized 0.7 percent on a lower rise in capital investments and consumer spending. GDP growth is decelerating and the government’s target of 2.6 percent growth for fiscal 2013, ending March 31, will be hard to achieve even though consumer spending is believed to have risen in the current quarter as people rush to shop before the three-percentage-point tax hike.

The index of consumer sentiments over the next six months fell in February, marking the third consecutive month of decline, according to the Cabinet Office, and economic growth is widely forecast to dive into negative territory in the quarter after the consumption tax hike.

Along with the large-scale fiscal spending by the Abe administration, the Bank of Japan’s radical monetary steps led to the yen’s steep fall against the dollar and pushed up share prices over the past year. But while the weak yen boosted the profits of large export-oriented manufacturers, the nation’s exports have not increased as expected, since many companies had already shifted production overseas or were losing out to global competition.

On the other hand, the yen’s fall has pushed up the cost of imports for both businesses and households. Japan posted current account deficits for four months in a row to January, when the deficit hit a record ¥1.58 trillion, as returns and dividends on overseas investments failed to cover the swelling trade deficit.

Employment conditions have improved, with the jobless rate at the lowest level in more than six years. Abe has urged profitable companies to use their improved earnings to raise workers’ wages in an effort to realize a positive cycle of increased consumer spending that triggers more business investment. Some leading firms have responded by offering the highest pay raises in years. It is unlikely, though, that wage increases overall will be large enough to offset the rising burden on households due to price increases over the past year and the imminent consumption tax hike.

Sharp gains in share prices have symbolized the benefits of Abe’s economic policies, but the recent volatility in the stock market — partly due to rising jitters over global demand amid the Ukraine crisis and signs of slowdowns and financial risks in China — has added to the uncertainty over Japan’s economy.

Doubts are reportedly starting to grow about the link between the yen’s exchange rate and Japanese share prices, as fears rise that foreign investors, who have led the stock market gains so far, could become net sellers out of disappointment that the weaker yen has not increased Japanese exports. It has at least become apparent that the fall in the yen’s exchange value alone will not fix Japan’s economic woes. Whether “Abenomics” policies have substance beyond the fiscal and monetary steps will be tested in the months after the consumption tax hike.

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