Enter Abe, who has been pressuring the Bank of Japan into seeking higher inflation — in effect, helping to inflate away part of the government’s debt — and has also just announced a large new program of fiscal stimulus. How have the market gods responded?
The answer is, it is all good. Market measures of expected inflation, which were negative not long ago — that is, the market was expecting deflation to continue — have now moved well into positive territory. Government borrowing costs have hardly changed at all; given the prospect of moderate inflation, this means that Japan’s fiscal outlook has actually improved sharply. True, the foreign-exchange value of the yen has fallen considerably — but that is actually very good news and Japanese exporters are cheering.
In short, Abe has thumbed his nose at orthodoxy, with excellent results.
Now, people who know something about Japanese politics warn me not to think of Abe as a good guy. His foreign policy, they tell me, is very bad and his support for stimulus may have more to do with old-fashioned pork-barrel (tofu barrel?) politics than with a sophisticated rejection of conventional wisdom.
However, none of that may matter. Whatever his motives, Abe is breaking with a bad orthodoxy. If he succeeds, something remarkable may be about to happen: Japan, which pioneered the economics of stagnation, may also end up showing the rest of us the way out.