In his first policy address after taking office in October 2021, Japanese Prime Minister Fumio Kishida pledged to “faithfully rebuild” the economy after three decades of stagnation.

In a speech to parliament almost exactly two years later, Kishida said the economy was his priority “above all else”.

“The Japanese economy is facing a unique and unprecedented opportunity to achieve a transformation not seen in 30 years,” he told lawmakers.

“To seize this opportunity, I am determined to undertake bold initiatives never seen before.”

As Kishida prepares to step down following a leadership vote by his scandal-tarnished Liberal Democratic Party (LDP) on Friday, the Japanese leader leaves behind an economic legacy characterised by modest gains, rather than transformational change.

“The Kishida administration has basically followed the same economic strategy as the Abe and Kan administrations, which was to create a virtuous circle starting from rising wages, leading to a recovery in growth and inflation,” Shigeto Nagai, the Asia head of Oxford Economics, told Al Jazeera.

Once seen as a challenger to the economic hegemony of the United States, Japan’s economy has been in the doldrums since the collapse of a massive stock market and real estate bubble in the early 1990s.

Japan’s gross domestic product (GDP) today remains below its mid-1990s’ peak. Its workers’ salaries have barely grown since the height of the bubble, rising less than $1,200 from 1991 to 2022.

After taking office in October 2021, Kishida called for a “new capitalism” that would encourage innovation and growth while ensuring the fair distribution of the spoils.

In practice, Kishida, 67, pursued policies that for the most part hewed closely to the main planks of “Abenomics”, named after his predecessor Shinzo Abe, namely heavy deficit spending, quantitative easing and structural reforms.

“Kishida’s new capitalism aimed to adapt Abenomics by adding encouragement of start-up enterprises and greater embrace of digital technology, including policy support for semiconductor manufacturing, securing supply chains for critical minerals, and improving transport and communications infrastructure,” Craig Mark, an adjunct lecturer in economics at Hosei University in Tokyo, told Al Jazeera.

“The new capitalism policy also rhetorically pledged to continue to attempt to reduce gender inequality, and assist families with the costs and burdens of raising children.”

Kishida, who suffered from low approval ratings throughout his tenure amid a series of scandals implicating his LDP, also rolled out substantive policies of his own, including a major expansion of tax incentives aimed at encouraging the public to invest more of their savings in the stock market.

“The shift of huge household assets, which had been concentrated in bank deposits and insurance products, towards risk assets such as domestic and foreign equities and bonds is helping to revive the dynamism of the Japanese economy from the financial side,” Oxford Economics’s Nagai said.

Bank of Japan Governor Kazuo Ueda speaks during a press conference after a monetary policy meeting at the BOJ headquarters in Tokyo on July 31, 2024 [JIJI Press/AFP]

Arguably Kishida’s most consequential decision was his appointment of Bank of Japan Governor Kazuo Ueda, who in March raised the benchmark interest rate for the first time since 2007, signalling a break with decades of loose monetary policy.

While Kishida presided over positive changes in some areas of the economy, progress has been uneven, casting doubt on the prospects of a long-term reversal in economic fortunes.

After Japan’s economy expanded 1.9 percent in 2023 – one of its strongest performances in decades – GDP effectively stood still during the first half of this year.

“The BoJ has finally increased base rates to 0.25 percent, indicating an expectation of an improving economy, but despite some positive growth in 2023, particularly in the export sector, the Japanese economy has remained sluggish overall, especially in domestic consumption,” Mark said.

Japan’s economy remains vulnerable to external shocks, including “the weakening Chinese economy, geopolitical instability in the Middle East and Europe, and the possible return of another Trump administration”, Mark added.

Although Japan’s largest companies in March announced their biggest pay rises in 33 years, heeding Kishida’s calls for high wages in the private sector, workers’ earnings have begun to outpace inflation only recently.

Real wages in June rose 1.1 percent, the first gain in more than two years, followed by an 0.4 percent increase in July.

And while Japan’s benchmark Nikkei 225 stock index topped its 1989 peak earlier this year, the market has more recently been marked by severe volatility and given up a significant chunk of its gains.

“Recent positive economic signs, such as higher share prices and wage increases, are the result of an excessively lower yen and the associated inflation, which is already reversing,” Naohiro Yashiro, dean of the Faculty of Global Business at Showa Women’s University, told Al Jazeera.

Ryota Abe, an economist at Sumitomo Mitsui Banking Corporation, said although he believes it is “too early” to judge Kishida’s economic record, there are signs of positive momentum compared to the past.

“In the second quarter of this year, the economy revived at a stronger pace than the market had expected, which suggested that domestic consumption improved on the back of better wage growth,” Abe told Al Jazeera.

“Looking forward, as peoples’ wages are expected to improve while inflation will cool down, domestic consumption will likely support economic expansion for quarters to come.”

Pedestrians cross a street in Tokyo’s Ginza shopping district [Toru Hanai/Reuters]

Other analysts are less optimistic.

Yashiro said recent wage rises reflected higher inflation rather than increases in productivity that could spur lasting economic growth.

“Japan’s economy has made little progress under Kishida, with continuous negative wage increases after inflation in the last three years,” Yashiro said, describing recent signs of economic revival as a “blip”.

Economists broadly agree that Japan faces major obstacles to kick-starting a lasting economic revival, including a falling population, lagging productivity and an inflexible labour market.

Expectations for the East Asian giant’s growth in the near term are unsurprisingly modest.

In July, the International Monetary Fund downgraded its economic growth forecast for 2024 to 0.7 percent from 0.9 percent, citing disruptions to the auto industry stemming from a safety scandal involving a subsidiary of Toyota Motor Corp.

The financial body forecasts similarly modest growth of 1 percent in 2025.

“With a declining population, despite foreign workers now reaching their highest level of around 3 percent of the labour force, even if Japan embraces large-scale immigration, which is very unlikely, this will not be enough to counter inevitable long-term stagnation, which can only be partially offset by more widespread introduction of technologies such as robotics and AI,” Mark said.

“The long-term challenge for Japan, similar to other developed societies such as South Korea and the EU, will be to see if they can manage the transition into an economy which has a declining population, but nevertheless can maintain sustainable prosperity, and equitable high living standards, utilising high technology and renewable energy.”

Nagai said Kishida’s ability to implement the kind of reforms needed to safeguard Japan’s future prosperity was constrained by political realities.

“In addition to his limited influence within the ruling party, political headwinds, including the serious financial scandal by the ruling party, has led to a slump in public support for his government,” he said.

“This weak political base meant that he was unable to implement drastic reforms that were necessary for the revitalisation of the Japanese economy in the long term but would be painful in the short term, and his fiscal policy tended to focus on short-term handout measures while avoiding serious discussion about funding measures.”