Following a period of exuberance around Abenomics, Japanese Prime Minister Shinzo Abe's three-pronged economic revival program is now generating a sense of unease among investors.
Abe initiated his "three arrows" strategy - based on a loose monetary stance, expansive fiscal policy and structural reforms - in December 2012, following his election as prime minister.
One-and-a-half years on, the way Abenomics has progressed can best be described as "eating dessert before the main course," says Freya Beamish, economist at Lombard Street Research.
"Attacking the deflationary expectations through monetary policy was the easy part (the dessert). Now you are left with a plate of spinach that nobody really wants to eat," she said, referring to the more difficult structural reforms and bringing the budget deficit under control.
The growing sense of impatience among investors over stalled structural reforms is reflected in the Nikkei 225's performance. The index is down 12 percent year to date, after gains of near 60 percent last year.
This week, the International Monetary Fund identified Japan as a risk to Asia's economic outlook, saying that there's a possibility that Abenomics could prove less effective than envisaged. It noted a successful transition to self-sustained, deflation-free growth remains uncertain.
Beamish, who recently traveled to Tokyo to conduct meetings with asset managers, policy makers and economists, said the fact finding mission didn't deliver a conclusive answer as to how Abe's reform agenda can pick up the baton from Bank of Japan governor Haruhiko Kuroda.
The Bank of Japan on Wednesday kept monetary policy steady by a unanimous vote, maintaining its pledge to to double base money via aggressive asset purchases to accelerate consumer inflation to 2 percent in roughly two years.
Market expectations for further monetary easing have been growing alongside the introduction of the consumption sales tax on April 1, which some economists say threatens to stall the recovery.
However, a new view has entered circulation, Beamish said, which is that Kuroda is becoming reticent to double up on the bet when so little progress has been made on the structural reforms.
"In reality the reforms haven't even started and Kuroda is left in the position of having to decide whether to double up on that risky bet or back down from a 'whatever it takes' type statement and face the consequences," she said.
Elephant in the room
The success in generation growth and inflation gives also rise to new problems, Beamish said.
"Eventually, interest rates would have to rise and there are no illusions as to the level of Japanese government debt ratios and the trajectory," she said.
Japan has the world's largest debt-to-gross domestic product (GDP) ratio, at over two-to-one.
"Japanese government debt has been the elephant in the room for a long time. But the view that this ends in defaults was mentioned on more than one occasion," she said.