Japan can no longer use conventional monetary and fiscal policies to get the economy moving. And Japan's government is already deeply in debt, already running huge deficits. So it might appear that there are no easy answers, that nothing short of a total restructuring of the Japanese economy can turn it around. But over the past year a growing chorus of Western economists has argued against this fatalistic view. After years of warning about the risks of inflation and the importance of sound policy, the BOJ has suddenly begun flooding the market with liquidity.
Banks now charge each other only for the administrative costs of making the loan.
And still the expansion continues. There are, of course, big risks in any such radical policy departure. Suppose, for example, that the Bank of Japan were to try to convince the public that the future will bring inflation, not deflation. But that the target inflation rate is too low, so that even if everyone believed that target would be achieved, the Japanese economy would remain seriously depressed. By sometime next year, the Land of the Rising Sun may, at least for a while, live up to its billing.