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Mr Abe's economic agenda is having its greatest impact in the area of monetary policy. The
prime minister has put pressure on the central bank to increase monetary stimulus. This
initially resulted in the announcement at the BOJ's January policy meeting of a shift to an
explicit 2% inflation target and the introduction of an open-ended quantitative easing (QE)
programme from 2014. At the time, we considered these policy changes to be potentially
the most important in Japan for many years, but they have been trumped by more recent
events, following Mr Kuroda's appointment as governor of the BOJ on March 20th.
New course
Mr Kuroda, a former president of the Asian Development Bank, has wasted little time in
setting a new course. In early April the BOJ switched from targeting interest rates to
targeting the monetary base, under a programme that it calls "quantitative and qualitative
easing". This recalls the period 2001-06, when the BOJ pioneered QE (then still an obscure
policy internationally) by targeting the levels of current-account balances that commercial
banks held with it. Although the central bank's latest programme is similar in some respects
to the original one, it is much more ambitious. The BOJ aims to double Japan's monetary
base from ¥138trn (US$1.4trn) at end-2012 to ¥270trn by end-2014. It will increase its
holdings of Japan government bonds (JGBs), exchange-traded funds and real-estate
investment funds. The bank will also buy longer-dated JGBs, with the aim of encouraging
risk appetite further along the yield curve.
Monetary expansion has been accompanied by fiscal stimulus. In late February parliament
approved a ¥10.3trn (US$105bn) central-government funding package focused on
infrastructure. Adding in local-government and private-sector projects, the total value of
stimulus is ¥20.2trn, equivalent to 4.2% of annual GDP. The budget for 2013/14 (April-
March), which was approved by the lower house on April 16th, includes a 15.6% increase in
public works spending. The total budget, however, is just 2.5% larger than last year, and
although additional funds have been allocated to sectors that will boost economic activity,
the government has made spending cuts in other areas.
Will it work?
The question is whether Mr Abe's policy changes will work on a chronically sluggish
economy that has resisted previous stimulus efforts. Anticipation of QE, and its subsequent
announcement, has boosted Japan's stockmarket and weakened the yen—notwithstanding
some reversals in the past few days that are likely to have reflected investor concerns about
the global economy (weak Chinese GDP data released on April 15th probably played a role).
The wealth effect of rising Japanese asset prices could boost the real economy at the
margins. At the same time, the BOJ's asset programme will almost certainly contribute to
further yen weakness, benefiting exporters. Our latest monthly forecast for Japan expects
the yen to be weaker than previously envisaged, with the currency averaging ¥98.3:US$1 in
2013 and ¥102:US$1 next year.
However, we remain doubtful about the ability of unorthodox monetary easing to flow
through into wide-ranging and sustained gains in the real economy. Such improvements will
require structural reforms; these are also part of Mr Abe's agenda, but their success is far
from certain in the face of entrenched interests. Lingering overcapacity, high public debt
and negative demographic factors will also continue to weigh on growth.
We have recently revised up our projection of Japanese economic growth in 2013. We now
expect real GDP growth of 1.1% this year, up from 0.9% in our previous forecast. However,