TOKYO (Reuters) – Japan’s “Abenomics” stimulus program appears to be reaching a turning point as growth is sputtering and the hit to exports from slowing global demand is spreading to various sectors of the economy.

The slowdown makes it more likely that the government and central bank will need to devise novel ways to stimulate growth in the world’s third-largest economy in 2020, although they are hampered by a near-empty policy arsenal.

Analysts don’t expect a fourth-quarter contraction to be a major catastrophe as long as a fragile Sino-U.S. trade truce lasts.

But the signs that the economy is cooling after a year of expansion threaten Prime Minister Shinzo Abe’s goal of achieving both economic revival and fiscal consolidation through a policy mix of monetary easing, flexible spending and structural reform.

Policymakers have argued that the domestic economy remains shielded from the heavy blow to exports and factory activity from declining external demand.

But analysts question whether the divergence between the manufacturing sector and the broader economy can last, as sliding sales of cars and at department stores suggest policymakers may have overestimated the strength of consumer demand.

“There is always a link between the manufacturing economy and the domestic economy. Ultimately, the weakness of one will spill over into the other,” said Steve Cochrane, chief APAC economist at Moody’s Analytics.

To be sure, Abe’s reflationary policy has helped boost gross domestic product to 540 trillion yen ($4.9 trillion), up 8.6% from 2012 levels, thanks to a windfall yen weakness boosting exporters’ profits and share prices.

But a string of data shows that domestic demand is weakening and labor market conditions are loosening.

Department store sales fell much more than expected in October after a nationwide tax hike kicked in that month. The fall was 1.5 times as large as in the month of the previous tax hike, in April 2014.

(For an interactive graphic of department store sales, click: here)

New car sales were still reeling from a post-sales tax hike pullback in demand in November, sliding 13% compared with the same month in the previous year. They had already nearly recovered in the same time period after the 2014 tax hike.

(For an interactive graphic of new car sales, click: here)

Declines in car production due to weaker demand both abroad and at home and a powerful typhoon pushed down factory output too, which shrank at its fastest pace in nearly two years in October.

A stagnation in output is already leading to an easing of conditions in the job market for manufacturers, the Bank of Japan’s December “tankan” survey showed.

If the labor market eases further, wage growth will weaken and that will threaten a key driver behind consumer spending, a government official said.

“It will be a red light (for the economy) if first-quarter growth is bad,” the official added.

GROWING DEBT PILE

The weakening of the economy is taking its toll on the state’s already dire finances, causing tax revenue to undershoot official estimates after seven years of growth.

Despite the sales tax hike and the near 30% rise in tax revenue from 2012 levels to above 60 trillion yen, officials say Abe is set to miss his latest revenue target.

That would mark a setback for his strategy of counting on higher tax income as well as the BOJ’s low-rate policy to rein in a growing debt that’s over twice the size of Japan’s $5 trillion economy.

(For an interactive graphic on Japan’s state finances, click: here)

But losing the ability to both raise spending and curb debt and warnings of credit downgrades will further cloud the outlook for Abe’s stimulus.

“Indications that the government is unable to take measures that would mitigate the long-term economic and fiscal costs related to an ageing society would likely prompt a downgrade,” credit ratings agency Moody’s Investors Service warned in a report last month.

Further straining finances, Japan has slashed its tax income estimate for the current fiscal year by more than 2 trillion yen from its initial target as the export slump caused by the 17-month-long Sino-U.S. trade war hit receipts.

To compensate for the shortfall, the government will issue additional deficit covering bonds worth 2.2 trillion yen in an extra budget for this fiscal year.

A government official shrugged off weakening tax revenue as a one-off, saying that tax income should return to steady growth in the near future.

Japanese policymakers remain complacent about the country’s fiscal situation, reflecting a global trend toward shifting away from monetary to fiscal stimulus, with limited room left for monetary stimulus to battle any future financial crisis.

“We have to strive to achieve both economic growth and fiscal reform at the same time,” former economy minister Yoshimasa Hayashi, a member of Abe’s ruling Liberal Democratic Party, told Reuters.

“That is the only way we can achieve fiscal reform.”

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