(Reuters) - For a close-up view of where Japanese Prime Minister Shinzo Abe's economic policies could falter, skip across Tokyo Bay to the sprawling Kimitsu steelworks, once a must-see icon of Japan's export boom.

By the early 1970s, Kimitsu in Chiba had become the hub of the world's largest steel operation. It provided the sheet metal for the first wave of Japanese cars sold overseas and the beams to build the first skyscrapers in Tokyo's Shinjuku district, inspiring Chinese leader Deng Xiaoping on a 1978 visit to build a copycat mill in China.

But last month Nippon Steel & Sumitomo Metal Corp, fresh off a merger that created the world's second-biggest steelmaker, announced it would shut down Kimitsu's No. 3 blast furnace, part of a sweeping restructuring meant to shed overcapacity at home in the face of unrelenting competition from China and South Korea.

"It makes no sense to revive it," the Kimitsu plant manager, Ichiro Sato, told reporters on a tour last week. "We want to operate without bringing it back."

That same caution is echoed by Japanese manufacturers in industries from autos to electronics.

Despite signs of an early stirring in consumer spending, a weaker yen and a recent rally in stock prices, companies remain deeply reluctant to invest in new plants and equipment even though the existing capital equipment -- like Japan's workforce - is ageing.

This reluctance could be the biggest challenge to Abe's policies aimed at driving Japan out of a decade and a half of falling prices and stagnant growth by getting the Bank of Japan to flood financial markets with yen.

The idea is that the BOJ's policies will reduce long-term interest rates to make borrowing cheaper and simultaneously encourage businesses to invest by turning around long-entrenched expectations of deflation into a belief prices will rise.

The risk is that unless Japanese companies and households start to borrow and invest and wages rise, the transmission between the BOJ's monetary policy and the rest of the economy will remain uncertain.

David Fuller's view The crucial question for Japan watchers, which I have mentioned before, is whether or not the country's disinflationary and deflationary economic slide since 1990 (historic, weekly 10Yr & 5-Yr) has been too long and damaging, including to the Japanese psyche, for the country to recover in response to Shinzo Abe's stimulative efforts?

The correct answer could not be more important for Japan. It will have a considerable influence on the Asian region and could also affect the global economy. It will likely determine the difference between a good medium-term rally for the Nikkei which we have already seen, or a cyclical bull market similar to the one between 2003 and 2007 during Junichiro Koizumi's government, or perhaps even a long-term secular recovery for Japan's economy and stock market.

Few people, including the Japanese, will be expecting a cyclical bull market for Japan after 23 years of disinflationary and deflationary decline, let alone a long-term secular recovery. Nevertheless, the preconditions are there in terms of valuations and particularly Shinzo Abe's stimulative efforts which currently have wide support. My Koizumi's efforts in the previous decade were cut short by political term limits, and more importantly, the global economic slump in 2008 which made most people considerably more cautious, not least the Japanese.

The counter argument against a significant recovery in Japan is put forward by the article above. Why should corporate Japan reinvest and expand, given the long-entrenched expectations of deflation? Its caution is understandable but it is also a lagging indicator, in my opinion. One of Shinzo Abe's challenges is to address the concerns of Japan's businesses and also its investors. He will know this.

Meanwhile, as international investors scramble to reacquire a reasonable weighting in Japanese equities, liquidity from Japan is helping to fuel a number of other stock markets, from India to New Zealand, where the financial indices are clearly showing relative strength.