Three weeks before Japan increased its sales-tax for the first time in 17 years, Prime Minister Shinzo Abe turned to Nobel laureate Robert Shiller to try to restore a vital ingredient of his economic revolution: Optimism.

Abe met the Yale University professor in Tokyo on March 10 to discuss how to reverse what the Japanese leader calls the “shrunken mindset” entrenched in the country after two decades of economic stagnation. With a public-relations team of about 100, TV appearances and use of buzz-words like Abenomics, Abe is trying to revive a risk-taking spirit to unlock the investment, spending and wage gains needed to sustain his reflation plan. 

“It’s important to have it sound like a revolution,” said Shiller, co-author of the 2009 book “Animal Spirits: How Human Psychology Drives the Economy and Why it Matters for Global Capitalism.” “Launching animal spirits is about capturing the public spirit ― the zeitgeist.”

While Abe met with early success in stoking consumer prices and confidence, last month’s tax increase sent business and household sentiment tumbling. The task for the administration now is to ensure the dip proves temporary. A June announcement on measures to expand business opportunities provides Abe with the next test of his strategy.

Shiller said he and the prime minister discussed that “third arrow,” which follows fiscal and monetary stimulus. Those first two prongs of the economic plan have so far failed to induce the pay rises and investment needed to offset the effects of the higher sales tax.

“A large part of Abenomics is psychology,” said Yoichi Sekizawa, a senior fellow at RIETI, a thinktank linked to Japan’s trade ministry. Abe’s language on TV shows he’s trying to lift the national mood by “emotional contagion,” or changing people’s perceptions by blanketing them with positive messages, Sekizawa said.

“If my mindset is negative, this will likely have an effect on the whole country,” Abe said on Fuji TV’s “Waratte Iitomo” variety show in March. “I have to be as cheerful as possible.”

Abe was the first prime minister to make a studio appearance on the popular show that closed a 32-year run that month, underscoring his determination to reach a broader audience than just viewers of current-affairs programs.

In the year after Abe came to power in December 2012, confidence indexes soared and people were the most satisfied with their lives than at any time in the past 18 years, according to Cabinet Office surveys. “Abenomics” was the most searched-for definition on Google Japan last year.

Abe’s early success in fostering positive sentiment began to slide in the second half of last year as a rally in stock prices halted and consumers braced for last month’s 3 percentage point rise in the sales tax.

Consumer confidence plunged from a six-year high in May last year to the lowest level since 2011 in April. Businesses are also treading carefully, with large companies planning to boost investment just 0.1 percent in the year ending next March.

The contrast between the initial euphoria generated by Abenomics and the caution of business owners can be found on the plush velvet sofas of the exclusive Inaba club in Tokyo’s Ginza district. Patrons have splashed out more on bottles of Dom Perignon champagne ― at over $1,000 a pop, according to proprietress Aki Shirasaka, 47, who also owns two other bars and a restaurant in the upmarket area. “There was an excitement that something will happen,” she said.

Shirasaka said she has yet to feel the economy has improved enough to raise wages. She’s not alone. Base salaries, excluding overtime and bonuses, have fallen for 22 straight months, lagging behind the nation’s nascent return to inflation.

“People haven’t reached a point where they will take action” such as making riskier investments or starting new businesses, said Kenji Yumoto, chief senior economist at the Japan Research Institute and a former Cabinet Office official in charge of the nation’s growth strategy. “The crucial test for Abenomics comes this year.”

Abe’s administration will next month unveil the second phase of his growth plan, under which it may lay out plans for a cut in corporate taxes and details of looser regulations in forthcoming special strategic zones.

One debate is how to alter labor laws based on a tradition of lifetime employment that, while encouraging loyalty, reduce workforce flexibility.

“Part of the third arrow might be to reduce labor market rigidities, and make it easier for firms to fire people,” said Shiller, who counseled Abe that he should be wary of losing the benefits of goodwill generated by the model. “I said I would be careful not to throw the baby out with the bathwater.”

Abe’s positive approach contrasts with that of his immediate predecessor, Yoshihiko Noda, who likened his personality to a loach fish rather than a cheerleader ― a freshwater bottom feeder who would “work and sweat to push down-to-earth policies.”

“Appearing pessimistic is a national Japanese pastime,” said Tomohiko Taniguchi, a former journalist whom Abe tapped as a special adviser on strategic communication. “The leader of the nation has to work as the cheerleader-in-chief.”

As part of his charm offensive, Abe handpicked Haruhiko Kuroda as Bank of Japan governor. In a speech in London in March, Kuroda referred to people’s expectations on 26 occasions, reinforcing the key message of the central bank’s easing policy.

The government aims to break the risk-averse mindset caused by deflation “and revive people’s animal spirits,” Kuroda said in a speech in Tokyo on May 15.

Without higher base wages and noticeable changes in deregulation and investment, there are signs that the public is losing patience.

“Abe sends message after message so the Japanese are getting brainwashed into believing the economy is improving,” said Kazunori Kawasaki, a 27-year taxi driver in Tokyo. “Most of my customers say he’s all mouth.”

While data last week showed the economy expanded in the first quarter at the fastest pace in more than two years on higher consumption ahead of the April tax increase, Abe needs to sustain momentum in the second half of the year and beyond.

Without a real pickup in the economy, the nation’s long-term mindset is unlikely to change, according to Yoshiro Tsutsui, a professor at Konan University and executive director of Japan’s Association of Behavioral Economics and Finance.

“Abe’s government has done almost all it can do verbally,” Tsutsui said. “If the real economy doesn’t follow suit, there’s a high chance things won’t go well.” (Bloomberg)