While the US noisily carries on its never-ending argument over the debt ceiling and public expenditure sequesters, Japan recently made some daring moves to get over its own slump.
The Bank of Japan raised its view of the economy for the first time in eight months, following bold monetary measures taken by newly-elected Japanese Prime Minister, Shinzo Abe to stimulate the Japanese economy, including an open-ended commitment by the Bank of Japan to buy assets and push inflation up to 2%, while simultaneously committing to increased fiscal spending.
This isn't the first time Japan has made an effort to raise inflation expectations. In the early 2000s, the Bank of Japan expanded the money supply internally to raise inflation expectations. By late 2005, the policy paid off as the economy finally began to recover.
However, once the banking crisis and the European crisis hit, all gains were nullified. As a highly export-oriented economy, Japan faced a double whammy from the crisis. It lost markets in the US and Europe, where demand weakened. In addition, the yen's status as a "safe haven" currency, or one that strengthens during economic downturns due to the increase in riskiness of other assets led to an appreciation in the yen. Both these put together resulted in a decline in real GDP growth and exacerbated the chronic price deflation that Japan constantly struggles with.
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