'Abenomics' to the Rescue

If Japan succeeds, the lesson for the U.S. will be that the aggressive monetary policy can work.

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Japanese Prime Minister Shinzo Abe speaks during a press conference in Tokyo, Friday, April 19, 2013. Abe said reviving Japan's growth will depend on further opening the economy and tapping the underutilized potential of its women and advanced technology. Abe outlined the next steps of his grand plan for restoring Japan's economic power Friday, describing a slew of initiatives he said would help awaken Japan's "sleeping dynamism."

A former member of the European Central Bank's executive board recently gave a grim assessment about the global economy. He declared, "We really don't understand what's happening in advanced economies." 

Since the financial crisis of 2008, many of the world's developed countries have been trapped in a period of slow growth, and the current remedies don't appear to be working. With America's growth anemic and Europe's economy contracting it has fallen to other countries to find a solution to this crisis, and currently the developed country with the most ambitious plan is Japan.

Under Prime Minister Shinzo Abe, Japan has embarked on a bold policy of reform referred to as "Abenomics." The goal of Abenomics is nothing less the complete reversal of the decades of slow growth and deflation that have afflicted Japan since its economy crashed in 1991. 

Abe describes the three pillars of his policy as: "bold monetary policy, flexible fiscal policy and a growth strategy that encourages private investment" In other words, using every single possible policy avenue to stimulate the economy in the short term, and to try and change the structural factors that reverse Japan's low growth in the long-term.

[See a collection of political cartoons on the economy.]

Japan has many underlying problems to tackle. Abe wants more women in the workforce, and he wants various industries to be liberalized and opened to competition. He is even considering the possibility of exposing Japan's politically powerful and subsidized farmers to international competition.

But the most significant of part of Abenomics that Americans should pay close attention to is the monetary policy. Under the direction of Haruhiko Kuroda the Bank of Japan has embarked on an aggressive monetary expansion, arguably the most expansionist among the developed countries. 

The Bank of Japan has committed itself to inflation. It has a publicly stated inflation target of 2 percent, will be buying $78 billion worth of government bonds each month, and will make additional asset purchases as well. If the Bank of Japan is successful, there should be significant inflation. 

If those policies will not work, than the Bank of Japan will boldly try and find some other way to achieve its goals. The U.S. Federal Reserve has a similar commitment to 2 percent inflation in the long term, but is much less openly ambitious than its Japanese counterpart.

[Read the U.S. News Debate: Has the Federal Reserve Overstepped its Mandate?]

The hope is that a cheaper Yen will make exports more valuable, loans more appealing, and encourage domestic spending. So far the market has shown signs of confidence in the policy. The value of the yen is falling exactly as planned, and Japanese stocks on the Nikkei are doing very well. As a result, Abe and his government are now remarkably popular; the Japanese population is usually apathetic but it is giving a stunning 76 percent approval rating to Abe's government.

There are potential pitfalls ahead: Changes in monetary policy might ultimately be easier to achieve than changes in Japan's bigger structural problems, and Abe's nationalism does risk antagonizing nearby nations. 

But if Abenomics succeed then the lesson for Americans will be that the aggressive monetary policy can work if it is bold and if it given space to operate. The U.S. Federal Reserve has conducted its own quantitative easing policies, but they are not strongly supported by many U.S. politicians. There is a pathological fear that anything which weakens the value of a currency or which might be inflationary can't have any positive outcomes. Japan might just prove that this is not the case.

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