The reintroduction of the government subsidy in Japan on fuel-efficient vehicles, which propelled a big increase in retail spending and industrial production in January, will generate negligible benefit to the economy of the country, according to a report.

Going by the report of Capital Economics, a macroeconomics research consultancy, there is less pent-up demand and so the subsidy will encourage consumers to bring forward purchases that would have happened anyway rather than generating new sales.

Consumer confidence and consumer willingness to buy durable goods has been falling for over a year and were close to record lows. In short, there was a deficit of auto demand before the subsidy was introduced.

The report points out that there will be greater leakages as sales of imported vehicle will be higher.

Compared to the first introduction, this time imported vehicles are eligible from the start and purchases have increased even faster than for domestic autos.

In addition, the report has stated that most of the boost to production when the subsidy was introduced last time came from foreign schemes rather than from Japan's subsidy program. This time around, auto exports are struggling with a strong yen and slowing global growth and the subsidy will do nothing to relieve either.

Capital Economics has forecast that on balance the subsidy should provide some support to domestic auto production and this should provide a small boost GDP until the subsidy expires. Given the small size of the program and the limits on it, this is likely to be less than 0.05 percent of GDP across the full year.

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