With fresh mandate, can Abe deliver on third arrow?

Japanese Prime Minister Shinzo Abe
Getty Images
Japanese Prime Minister Shinzo Abe

The landslide election victory for Shinzo Abe's Liberal Democratic Party-led coalition gives the Japanese Prime Minister a fresh mandate for Abenomics, his ongoing effort to spur the economy, but market observers remain divided over his ability to deliver on the elusive 'third arrow' of his plan.

"We fear that reform progress will remain glacial in coming years, leaving potential growth pegged at around 0.5 percent," Marcel Thieliant, Japan economist at Capital Economics said in a note.

"We see the most pressing need for reform in areas that would boost the supply of labor and reduce the regulatory burden," he said. "In contrast, stronger investment alone is unlikely to improve growth performance by much since the capital stock is already larger than in any other G-7 economy."

In June, Abe unveiled a package of structural reform measures – part of the so called third arrow of Abenomics – to boost the economy. The package included plans to cut the corporate tax rate and reduce labor-market rigidities by boosting the role for women and foreigners in the workforce, but markets were unenthusiastic.

Read MoreShinzo Abe's coalition wins big in Japan election amid anemicturnout

"I think people are skeptical from here on in what is Abe going to do with this power, what are his priorities, where is that third arrow?" Jeffery Kingston, professor at Temple University in Tokyo, told CNBC. "People are waiting to see what he's going to do."

Still, some analysts are optimistic that with a fresh mandate Abe will be able to follow through.

"Abe now has a lot of political capital," which should enable him to carry out structural reforms, Tomohiko Taniguchi, the prime minister's special advisor to the Cabinet and Professor at Keio University told CNBC.

Labor market reform

One of Abe's key campaign pledges was that wages would rise next April, at the beginning of the fiscal year.

Read MoreJapan 4Q manufacturing sentiment worsens: Tankan

"Companies have been improving their profit margins by cutting costs, mostly pay, [thus] in relation to corporate profits, wages in Japan are low compared to other developed nations," Atsushi Nakajima, chairman of the Research Institute of Economy, Trade and Industry told CNBC.

"The economy is the priority," Tomohiko Taniguchi said. The Democratic Party of Japan's crushing defeat at the polls may pave the way for labor market reform, he said, noting he's confident wages will rise.

However, not all believe workers will see higher wages.

"Real wages and household income have been falling – how is increasing the number of workers that have minimal job security going to help drive up wages?" Temple University's Kingston said.

Read MoreJapan needs foreign workers, but will they come?

In the balance

The first and second arrows of Abenomics – massive monetary and fiscal stimulus to pull the country out of two decades of deflation – boosted Japanese stocks and sent the yen tumbling against the U.S. dollar over the past two years. But the Bank of Japan is still far from achieving its 2 percent inflation target by 2015. In November, core inflation stood at 0.9 percent, excluding the impact of the April sales-tax hike.

Meanwhile, a consumption tax hike designed to reduce the country's massive public debt, has seemingly backfired, jeopardizing the economic recovery. The economy shrank an annualized 7.3 percent in the second quarter and 1.9 percent in the third, slipping into a technical recession.

If progress on structural reforms remains slow and a weak economy puts fiscal and monetary stimulus efforts at risk, Abe's plan could backfire.

Read MoreWhy investors aren't cheering Abe's election victory

"From Mr Abe's perspective, his gamble has paid off. Yet the reality is that he has only bought himself some more time," Dr. Nicholas Spiro, managing director of Spiro Sovereign Strategy, said in a note. "His economic plan is still hanging by a thread, undermined by self-inflicted fiscal blunders and the failure to simultaneously reflate the economy while maintaining fiscal credibility."