After "Abenomics" failed to revive the ailing Japanese economy and his country slumped into its fourth recession since 2008, Prime Minister Shinzo Abe decided to call a snap election.
Mr. Abe has effectively called a referendum on economic policies many think are faltering. But as Japan heads into an election on Dec. 14, polls suggest Mr. Abe is probably going to win, maintaining a majority. His coalition might even increase its share of seats, despite economic woes.
How did Japan get here?
Declining expectations, perhaps. But then, a lot of things are declining in Japan. Historically, one of those has been confidence: The country is still dealing with a bruising "lost decade" in the 1990s – when Japan's bubble economy popped – that eventually stretched to two decades, and basically continues.
Another is Japan's shrinking population, which could slip from 127 million today to 87 million in 2060, a demographic time bomb. Wages have also been in decline, in real terms. And Japan's economy has largely stood still, with GDP growth contracting in the past two quarters – one common definition of a recession. The only things growing in Japan seem to be its national debt – twice the size of the economy and growing – and the number of retirees.
Mr. Abe did not create these problems, of course, but he's pledged to reverse the slide.
The problem is that while Abenomics has helped jolt the economy – leading to stock market gains, some inflation and a depreciated yen, as planned – it has not ushered in anything close to a stable, broad-based recovery.
Although it still has the world's third largest economy, Japan is in many ways simply managing its decline – a comfortable, relatively prosperous decline, but one nonetheless. That's why Mr. Abe's plans for a painful revival are so jarring, not just for the working class families weathering his harsh policies – but for critics who think "Abenomics" just isn't going to work. "This is an election to hide the failures of Abenomics," one rival politician said.
After a previous unremarkable stint as prime minister, Mr. Abe rode a nationalist wave in 2012 and burst onto the international stage rattling his sabre at an increasingly assertive China. "Japan is back," he declared in Davos, Switzerland. And it is true that people are talking about Japan again.
But more recently, talk has not been positive. Mr. Abe is grappling with less riveting subjects than war. He's focused on resuscitating the economy, and things have not been going well. Japan's current election is centred on Abenomics and the "three arrows" at its core: monetary easing (buying government bonds) to halt Japan's deflation; increased public spending; and structural reforms – such as in the labour market – to enable long-term economic growth.
Critics say the first two arrows have already flown wide of their targets. And now Japan is in recession.
Monetary easing decreased the value of the yen and made imports more expensive for working families. This has struck a blow against Japan's persistent deflation – which leads to falling prices, wages and employment – but recent growth in wages has not kept up with inflation. Workers are hurting. Inflation is still below target.
The large fiscal stimulus was then undermined by a hike in the consumption tax from 5 per cent to 8 per cent. The hike was planned by a previous government to reduce Japan's debt burden but made companies sit on cash, plunging the country into a technical recession. Mr. Abe then postponed a second hike, and called the election.
Mr. Abe has talked vaguely of structural reforms, but has so far remained hesitant to fire his third arrow at entrenched interests in Japan. One example are the subsidies and steep tariffs that protect Japan's small but powerful agricultural lobby. Labour market regulations, which need an overhaul, have resulted in firms lowering wages and increasing part-time and temporary workers, which has only made people delay starting families and led to low productivity.
Mr. Abe's prime ministerial predecessor, Yoshihiko Noda, even compared Abenomics to "voodoo economics," in that it assumes gains accrued by the rich will trickle down to the less well off.
If Mr. Abe secures a strong mandate, he will need to start acting on these tougher policy issues. Despite a lot of well-deserved skepticism, some investors are optimistic. Japan certainly isn't over, but it's not back yet.