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Japan Prime Minister's Toughest Test

"Changing expectations, creating a more upbeat mood, that in itself is an accomplishment. People are feeling more optimistic and we see it. The stock market is up. The yen is down. Abe's popularity is soaring," said Gerald Curtis, a Japan expert at Columbia University.

Investors will be watching closely, though, for progress in ensuring future growth.

"The question is whether there is the political will and the political ability to get it done. I think Abe's done well but there's a degree of 'irrational exuberance' ... about so-called Abenomics," said Curtis.

So far, economic data have not reflected the optimism seen in the financial markets, though the economy did just barely emerge from recession in the last quarter of 2012.

A quarterly central bank survey released Monday, known as the "tankan," showed business sentiment improving for the first time in nine months, though the gains were weaker than expected. So far, the consumer price index has not budged, despite daily newspaper reports of plans for increases in electricity rates, food prices and other daily necessities.

Abe and fellow LDP leaders must make more headway in reviving the economy before an upper house parliamentary election in July that will determine if they will have a strong enough mandate to pursue other goals, such as politically difficult economic and educational reforms and changes to the constitution to give Japan's military a higher profile.

Getting the economy rumbling again will require consumers to spend more. That depends on a "wealth effect" spilling over from the run-up in prices for shares and other assets, and on convincing people to buy and borrow now, at lower prices, to avoid higher prices later.

Making that will work will depend in part on whether families, whose purchasing power has been declining since 1997, feel they can afford to spend more. Higher wages would help, but salary increases this spring were modest. Companies need to be sure the market is turning around before they will boost hiring and wages.

Recent reports suggest some Japanese are stepping up purchases of luxury products at big department stores, but retail sales figures show no signs of a mass spending spree.
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