Prime Minister Shinzo Abe said the deflation that wiped out much of Japan’s growth the past 15 years and so stunted the economy that it slipped to No. 3 behind China, has ended and will be thwarted by new government policies designed to encourage business expansion.

“Through bold monetary policy, flexible fiscal policy and the growth strategy we have reached a stage where there is no deflation,” Abe, 59, said in an interview Tuesday at the prime minister’s official residence in Tokyo. With the first sales tax rise since 1997 that took effect in April, “this was an extremely difficult time for management of the economy, but I believe we were somehow able to overcome it.”

Abe was speaking before his cabinet endorsed the most specific measures yet to deliver on his growth strategy ― the third part of a campaign to end declines in consumer prices and stoke investment. The government plans corporate-tax cuts, trade liberalization, reduced barriers for agricultural land consolidation, special zones of lighter regulation and the study of casinos as a way of spurring record numbers of tourists.

The steps are part of Abe’s strategy to restore Japan’s influence in a region where China is the dominant power. A strengthened economy would boost Japan’s appeal to nations from the Philippines to India as a counterweight to China, which caused concern among neighbors pressing its claims on disputed territories.

Eighteen months into office, the first two pillars of Abe’s platform ― monetary and fiscal stimulus ― have succeeded in kindling inflation, while failing to raise longer-term growth estimates. Unless companies unleash record cash and increase salaries and capital spending, the danger is that Abenomics ends up hurting purchasing power without reviving the economy. 

“This may be the last chance for Japan to get out of stagnation ― Abe can’t afford to fail,” said Nobuyasu Atago, principal economist at the Japan Center for Economic Research in Tokyo, who previously worked at the central bank. “A difficult aspect of the growth strategy and regulatory change is that it will take a few years for them to clearly lift the economy.”

What’s now the world’s third-largest economy is 3.5 percent smaller than when Abe took office for the first time, in September 2006, when unadjusted for changes in the price level. The contraction eroded the tax base for a nation with the world’s largest public debt burden at an excess of 240 percent of gross domestic product, prompting Abe’s predecessor to enact a two-step rise in the consumption tax.

The change in the levy put the economy on a roller-coaster in the first half of 2014, with GDP jumping at an annualized pace of 6.7 percent in January-to-March from the previous quarter, when adjusted for inflation. The median estimate of economists surveyed by Bloomberg News is for a 4.4 percent contraction in the quarter through June.

“There was no other way to achieve an escape from deflation at the same time as restoring fiscal health,” Abe said in the interview, referring to what he calls his three-arrow strategy of reflation along with the sales-tax increase. “We want to achieve fiscal health by escaping from deflation and achieving economic growth.”

Abe said that among his policy initiatives he will aim to lower the corporate tax rate to 20 percent to 29 percent over a few years, from about 35 percent now. The rate is currently the second-highest in the Group of Seven, after the U.S., and compares with 23 percent in the U.K. South Korea’s rate is 24 percent.

“Abe has new momentum for reforms,” Robert Feldman, head of Japan economic research at Morgan Stanley MUFG in Tokyo, wrote in a report Wednesday. “The autumn focus in growth policy will be the extent and timing of corporate tax cuts.”

The ruling Liberal Democratic Party also wants a vote in the next session of parliament, which typically begins in September or October, to legalize casinos as part of a plan to boost tourism. Abe said in the interview that integrated resorts “can be one of the key elements” of the growth strategy.

His remarks on the end of deflation compare with past comments by government officials that Japan was in the process of escaping from deflation.

The prime minister’s comments Tuesday came more than a year after a May 2013 roll-out of the outlines of his first growth-strategy approach. While investors initially applauded Abe’s plans, a lack of fast-track implementation, and the omission of bolder ideas such as allowing large-scale immigration to counter Japan’s population drop, or nationwide labor deregulation, has undermined confidence in the stock market.

The Topix index of stocks dropped 0.6 percent Wednesday, down about 3 percent for this year, after marking its fourth-biggest advance on record in 2013. The benchmark gauge traded at 1.2 times book value, compared with 2.7 for the Standard & Poor’s 500 and 2.2 for the MSCI World Index on June 23.

“We see a lot of funds, a lot of hedge funds, starting to take profits on the Japanese market,” Patrick Legland, head of research at Societe Generale SA, said in an interview with Bloomberg Television Tuesday. “Gradually, maybe the economy is slightly picking up. Maybe salaries are also slightly picking up. But it’s far, far far below from what people expect to have a structural change in this economy.”

The International Monetary Fund projects less than 1 percent GDP gains each year from 2015 through 2017, with an estimate of 1.125 percent for 2019 ― an expansion less than the pace it recorded in the half decade before the 2008 global credit meltdown. (Bloomberg)