Poor Japanese manufacturing data on Friday gave new Prime Minister Shinzo Abe more ammunition to push for big spending and easy money to salvage the world's third-largest economy from decades of deflation and its fourth recession since 2000.
Japanese voters and the financial markets have welcomed the Abe government's aggressive stance on pumping cash into the economy, pushing the benchmark Nikkei share average on Friday to its highest level since the March 2011 tsunami, despite the worse-than-expected drop in factory output.
Opinion polls published by major newspapers on Friday showed half to two-thirds of the public supported Abe's conservative government, with the stagnant economy the top priority.
Top officials of the new government, sworn in just two days ago after a landslide election victory, say Abe's administration is under pressure to achieve quick results.
"(Public support) will drop if speculation mounts that we are unable to deliver," Akira Amari, the minister in charge of reviving the economy, told a news conference after a Friday morning cabinet meeting.
But many economists warn that Abe's emphasis on stimulus, rather than structural reforms to boost competitiveness, may have only short-term effects and could worsen Japan's bloated public debt, the worst among the industrial nations.
PRESSURE TO PERFORM
The government is keeping up pressure on the Bank of Japan (BOJ) to step up its monetary stimulus, even after it loosened policy in December for the third time in four months.
Abe has threatened to change the law which guarantees the central bank's independence if it does not pursue more aggressive easing and has called for a doubling of its inflation target to 2 percent.
Finance Minister Taro Aso said he was paid a courtesy visit by BOJ Governor Masaaki Shirakawa on Friday in which the two agreed to hold talks on issues including coordinating policy.
Aso later told reporters the government wanted to firm up by next month, before the central bank's next policy meeting, its position on a joint policy accord it aims to forge with the BOJ on how they will tackle Japan's entrenched deflation.
The government has not yet tipped its hand on what specifics might be in the accord but the BOJ has already signaled it may set a higher inflation target at its Jan. 21-22 meeting, even while market participants express doubt that it has the means to achieve it.
Aso also warned that the government stood ready to intervene in the currency markets against sharp speculator-driven moves that would hurt the economy, although Abe's monetary easing campaign has in recent weeks eased some of the persistent yen strength that has battered Japan's exporters.
"If excessive rises or falls in the yen due to speculation cause trouble for a lot of people, intervention would be a powerful tool, so there's no reason why we would not use it," Aso said.
Asked whether Japan's efforts to ease monetary policy and weaken the yen may lead to competitive currency devaluations, he added: "It's wrong to say Japan is intervening unreasonably."
Weak factory output data on Friday, which fell a steeper than expected 1.7 percent in November, more than triple the median market forecast for a 0.5 percent drop, should bolster Abe's hand in urging more easing.
Japanese manufacturing activity also put in a bleak performance in Friday's Markit/JMMA Japan Manufacturing Purchasing Managers Index (PMI) for December, which declined at its fastest pace in more than three years.
PRETEXT TO PUSH STIMULUS
Japan's economy has slipped into a mild recession, hurt by weak global demand and slumping sales to China after a diplomatic row over disputed isles.
Analysts expect growth to pick up early next year, although any recovery will likely be slow and modest.
The industrial output data from the Ministry of Economy, Trade and Industry included a survey showing that manufacturers expect output to rise 6.7 percent in December and increase 2.4 percent in January.
"Today's data confirmed that the economy remained on a downward trend and this could be a reason for the government to adopt an expansionary fiscal policy," said Takeshi Minami, chief economist at Norinchukin Research Institute.
"But if you look at data closely, there are also signs the economy will probably be bottoming out, so the data could simply offer the government a pretext to use its stimulus plan to support the recovery."
Separate data released on Friday showed Japan's core consumer prices, which exclude volatile fresh food prices, edged down 0.1 percent in November from a year earlier, in line with the median market forecast.
The markets have focused on the prospects for more monetary easing and the impact on the yen, which slipped on Friday to its weakest in more than two years, at 86.64 to the dollar.
This has helped to fuel a rally in the shares of Japanese exporters, which were hurt by the yen's strength. The Nikkei benchmark has risen more than 20 percent since mid-November and ended 2012 with its best annual performance in seven years.
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