Hey Guys! If you remember well, Abenomics (named after Japan's prime minister Shinzo Abe) were expansionary fiscal and monetary policies aimed at taking Japan out of its painful stagnation that lasted about 23 years (it seemed very successful up until now).
Japan (apparently) recently entered in a recession, which sparked criticism of these Neo-Keynesian policies. Does Abenomics' failures support Neo-Classicals' argument that expansionary fiscal and monetary policies can only have a very short-run impact, if at all?
Not quite... I learnt that these new policies include a high increase in consumption taxes (in order to pay back the government's huge debt). This is in fact a contractionary fiscal policy, something Keynesians would have opposed strongly (with reason it would seem).
Also, Japan seems to be in an investment liquidity trap (remember the Provencher Liquidity Trap), which means that monetary policies will not work to stimulate the economy. One indicator that Japan is in such a liquidity trap is the reduction of inventories firms are implementing at the moment (most probably because of a lack of confidence in the future).
The prime minister of Japan, Shinzo Abe, is now calling for an early election to re-construct a new government. His intention is probably to get rid of his opposition in order to continue with his policies... However, it would seem that the most important part of his Abenomic Policies is badly missing: long-run structural reforms.
The structural reforms include improving women participation in the labour force (more human capital = higherY*), decreasing the power of some unions (for the harbor for example, New York is close to twice more efficient than Japan's main ports), and changing the culture of hierarchy in the corporate world (the disproportionate respect given to elder bosses and the family-only ownership culture bring substantial inefficiencies). These types of policies can bring much more economic activity in the future, helping Japan deal with its upcoming retirement crisis.
Written on the 19th of December: Abe won his majority not very long ago. He stated in his victory speach that he will now engage in this famous "third arrow" of structural reforms. I am very doubtful that he (or any other politician for that matter) can send Japan in a significant direction of structural reforms. Most of the core reforms that are needed are about cultural agreements in Japanese society... something the government will have a lot of trouble influencing in any substancial way. It seems to me that Japan has been living in a bubble of fantazy for so long that waking up to the real world will take a much bigger shock than that... or much longer than just a few years.