Japan's economy will likely grow faster than expected just a month ago, driven by aggressive monetary stimulus despite the recent surge in the yen and corresponding sharp fall in Tokyo shares, a Reuters poll showed.
The latest upgrade came after news that Japan's economy expanded at an annualised rate of 4.1 percent in the first three months of the year, more quickly than initially estimated.
Indeed, the world's third-largest economy is expected to outperform other advanced nations, if only in the near term for now.
That optimism has come from Prime Minister Shinzo Abe's unprecedented plans to stimulate the economy out of decades of on-off recessions and persistent deflation.
So while traders and investors have dumped Japanese shares in recent weeks and bid up the safe-haven yen, economists, who have long been pessimistic on Japan's prospects, aren't ready to give up on Abenomics just yet.
"The momentum of the economic recovery is stronger than previously expected, helped by strong private spending as the nation's expansionary policies boosted sentiment despite sluggish recovery in the income situation," said Shinichiro Kobayashi, economist at Mitsubishi UFJ Research & Consulting.
Analysts say Japan's policy mix will underpin the economy, while a moderate pick-up in global demand will help exports. Meanwhile, an expected rush of demand before a planned sales tax hike will buoy private spending later this year.
"Firms are also expected to raise their capex gradually on the back of positive business results," said Kobayashi.
Capital spending, a key measure of current and future business conditions, is expected to rise in April-June quarter after five consecutive quarters of declines, according to the poll of 24 economists conducted between June 13 and 17.
The poll showed the economy will grow 2.8 percent this fiscal year which started in April, the highest projection made by analysts since the March 2012 survey and up from 2.4 percent predicted in last month's poll.
But they forecast the economy will expand 0.5 percent in the next fiscal year, unchanged from last month.
Views on inflation, however, remained stuck. Japan's core consumer price index (CPI) is expected to rise 0.3 percent this fiscal year, the poll showed, unchanged from last month.
Analysts project core CPI excluding the effects from consumption tax hikes will rise 0.8 percent next fiscal year starting April 2014, also the same projection made in May.
By contrast, the central bank projects a 0.7 percent rise for this fiscal year and 1.4 percent rise for the next.
MORE BOJ EASING BEFORE OCTOBER POSSIBLE
While most analysts do not expect the Bank of Japan to take any further easing steps before the semi-annual review of its economic forecasts in October, six saw a chance for additional steps before then. None thought that in the May poll.
In April, the BOJ stunned markets by setting in motion an intense burst of monetary stimulus, promising to double its bond holdings in two years and boost purchases of risk assets.
But after the initial optimism that sent the yen to a 4-1/2 year low of 103.74 against the dollar and the Nikkei share average <.N225> to a 5-1/2 year peak of 15942.6 points, doubts about the effectiveness of the stimulus programme have grown.
The yen has since strengthened to around 95 yen against the dollar on Tuesday, while the benchmark Nikkei share average has lost about 18 percent since it peaked on May 23 following a rally of more than 80 percent since late 2012.
Abe's growth strategy consisting of measures such as setting up special economic zones and incentives to boost private investment has failed to impress investors and coincided with turbulence in global financial markets.
The disappointment prompted Abe to promise to take more steps after next month's upper house election.
Asked what steps were still needed, 12 analysts called for a corporate tax cut and 12 backed social security reform. Ten analysts chose labour market reforms.
On average, the surveyed economists projected that only 40 percent of reforms promised in the government's growth strategy will be implemented.
If the BOJ decides to ease again, 11 analysts said it will boost purchases of riskier assets such as exchange-traded funds (ETFs) and real-estate investment trust funds (REITs). Another option would be for the BOJ to step up government bond buying.
(Polling by Sarmista Sen; Editing by Kim Coghill)
Copyright 2012 Thomson Reuters UK. All rights reserved.