Abe

Easily the world's biggest political/economics story of the past few months comes from an East-Asian country, and it's not China nor its buffer state, North Korea. After more than two decades of recession/deflation (see the chart below), which seemed immune to frequent injections of fiscal and monetary stimulus, and a persistently moribund, unloved, under-owned, and cheap, below-book-value stock market, it seems a fire has been lit - in Japan.

Japanese voters brought back Shinzo Abe - a feckless former Prime Minister in 2006-07 - and his Liberal Democratic party last December, in an out-with-the-old, in-with-the-prior, general election. Expectations, within Japan and internationally, weren't high. But Mr. Abe and his cabinet have been anything but listless since then, and as a result, much has changed. As one of his first acts, Mr. Abe appointed Mr. Haruhiko Kuroda as the new central bank governor, providing him with a clear directive to emulate his counterparts in Washington and London by introducing a massive increase in the Bank's program of quantitative easing. And so Mr. Kuroda has, flooding the economy with new money - increasing the monetary base by some 60 trillion yen, five times the rate of increase implemented in 2012. The goal, a far more specific one than markets had predicted, is to achieve - within 2 years - price inflation of 2%, in the process eradicating, once and for all, the persistently deflationary expectations of Japanese citizens over the past decades.

Markets have responded dramatically. To begin, the yen has weakened steadily this year, from some 80 yen to the US dollar, to 101 yen now, a 4-year low. Foreign exchange traders are clearly convinced that Japanese interest rates, at record low levels, will stay that way, reflecting the central bank's backdrop of bond-buying. (The currency depreciation has been so rapid and substantial that some observers - including America's Treasury Secretary Lew - are now alert to the possible emergence of a currency war.)  Because a weaker currency makes a country's imports more expensive, thereby adding to inflation (desirable in Japan), and its exports more internationally competitive, by lowering their price in foreign-currency terms, Japan's stock market has come to life in recent months, with the Nikkei 225 jumping to nearly 15,000 after being stuck in a four-year range of 8,000-10,000; it's been virtually straight up for months, with analysts expecting more of the same. Not surprisingly, the latest reading from Japan's large-firm manufacturing confidence index indicates an improving, though still pessimistic, mood.

This is a start. Mr Abe and his new government have exceeded expectations. But much more needs to happen before the world's third-largest economy can be considered to be on a sustainable growth path. Corporate reluctance to invest, and increase wages paid to their workers, remains; Japanese consumers continue to save; and one of Japan's principal trading partners - China - is slowing. Demographic trends are especially unfavorable in Japan - the workforce is shrinking while the number of elderly are growing. As well, there is a risk that Mr. Abe, a staunch nationalist,​ won't bury such tendencies, essential if Japan's trade with its Asian neighbors is to thrive. But if his Liberal Democratic party members can win a majority in the Upper House of Parliament this July (the LDP looks set for a landslide), he will feel politically secure enough to push ahead with his proposed, long-needed structural reforms to the Japanese economy, thus creating the framework for a long-term national growth strategy. Such an opportunity - and such a marked change it would be from the years of stagnation in Japan. All eyes should be on Shinzo Abe.