As election nears, Abe turns to new crowd-pleasing "arrows"

By Leika Kihara TOKYO (Reuters) - Prime Minister Shinzo Abe is rewriting "Abenomics", shifting his focus away from long-term structural reforms to quick-fix crowd-pleasing measures as he looks to boost popular support ahead of upper house elections next year, sources say. That means the government will look at bringing in fresh fiscal stimulus measures later this year, while the Bank of Japan will struggle to win the argument that it should ease monetary policy to meet its inflation target, say lawmakers and politicians with knowledge of the deliberations. While Abe's Liberal Democratic Party is unlikely to lose power next year, members are nervous that it could shed some seats after passing controversial defence bills, so want to avoid any policies that would dent their support base. "Further monetary steps would clearly go against the government's objectives," one government official said, with people blaming the BOJ's easing for driving up imported food costs. Abe deployed three policy "arrows" in 2013, dubbed "Abenomics", to try to stimulate the economy. The first two arrows of bold monetary easing and fiscal stimulus helped brighten business sentiment and revive growth by weakening the yen and boosting stock prices. But progress on the third arrow - deregulation and reforms to boost Japan's long-term growth potential - has been slow. A sales tax hike pushed Japan into recession last year and growth has stagnated for much of this year as China's slowdown and rising food costs hurt exports and household spending. NEW ARROWS Disappointed over companies' reluctance to raise wages and wary of weak consumption, Abe is turning his sights to low-income households and pensioners. With three new "arrows", crafted not by economic mandarins but by political advisers, Abe hopes he can boost household spending and increase his approval ratings with handouts. The arrows consist of a target to boost gross domestic product (GDP) to 600 trillion yen ($5 trillion), lift the fertility rate and pursue social welfare reforms. Abe has said the new arrows aim to tackle structural problems left unaddressed for years, such as the labour shortage that is set to worsen as the population ages rapidly. But lawmakers familiar with the new "Abenomics" say the last two arrows are aimed at justifying more spending on child-care support, such as offering free early-child education, and building more nursing homes for the elderly. "The new arrows focus on redistribution of wealth mainly through child-care support and social welfare, because they are areas the public can relate to," said Etsuro Honda, one of Abe's key economic advisers. The government could decide as early as this month on whether to take fresh stimulus steps, rather than wait for the release of July-September GDP data next month, a government source close to the administration said. CRITICISM Business lobbies and academics criticise the GDP target as unrealistic, and say the new arrows lack the clear messaging that made the original arrows so effective. The growth target is based on a government estimate that Japan's GDP will reach 600 trillion yen around 2020 if it grows a nominal 3 percent each year - a pace never experienced in the past two decades. "I won't even call these arrows economic policy," said a lawmaker who is among Abe's economic advisers. "It has the smell of election campaigning." The new arrows also shed light on an emerging conflict of interest between Abe and his hand-picked BOJ governor Haruhiko Kuroda. Kuroda's massive stimulus is based on the "reflationalist" idea that by printing money aggressively, the BOJ can generate inflation and nudge companies into boosting spending. But inflation has ground to a halt on slumping oil prices, while rising import costs from a weak yen have hurt consumption. Wary of the rising cost and diminishing returns of Kuroda's stimulus programme, Abe is starting to distance himself from the BOJ's reflationist approach, politicians close to him say. The new arrows make no mention of monetary policy. While Finance Minister Taro Aso and Kuroda say it has been "condensed" into the new GDP target, the BOJ's fading prominence underscores Abe's changing priorities, politicians say. "It's clear the administration's priority has shifted away from monetary policy," said a policymaker close to Abe. The premier told an audience in New York on Tuesday that Japan has wiped out its "deflationary mindset," a day after Kuroda warned in a speech that it was taking time for companies to shift from their deflationary way of thinking. The contrast underscores the gap between the views of Abe - who feels that inflation need not accelerate further - and Kuroda, who persists on hitting 2 percent inflation, sources say. "The premier is probably saying the BOJ doesn't need to rush in achieving its 2 percent price target," said one government official with knowledge of the deliberations. ($1 = 119.9500 yen) (Additional reporting by Tetsushi Kajimoto, Sumio Ito, Takashi Umekawa, Linda Sieg and Izumi Nakagawa; Editing by Rachel Armstrong)