Abe surprised me!

I was wrong.

For months I voiced heavy skepticism that Shinzo Abe's new administration would follow through on its plans for huge economic policy changes - in particular, a serious push for reflation. Yesterday, Abe's new central bank chief, Haruhiko Kuroda, proved me wrong by announcing a dramatic new program of quantitative easing:

The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. In order to do so, it will enter a new phase of monetary easing both in terms of quantity and quality. It will double the monetary base and the amounts outstanding of Japanese government bonds (JGBs) as well as exchange-traded funds (ETFs) in two years, and more than double the average remaining maturity of JGB purchases... 

With a view to pursuing quantitative monetary easing, the main operating target for money market operations is changed from the uncollateralized overnight call rate to the monetary base...The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 60-70 trillion yen... 

With a view to encouraging a further decline in interest rates across the yield curve, the Bank will purchase JGBs so that their amount outstanding will increase at an annual pace of about 50 trillion yen... 

With a view to lowering risk premia of asset prices, the Bank will purchase ETFs and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at an annual pace of 1 trillion yen and 30 billion yen respectively... 

The Bank will continue with the quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner...

Note that "price stability target" means inflation target.

Now, 60-70 trillion yen is about $600-700 billion, which is about the size of America's recent "QE1" and "QE2". Japan will basically do an new "QEx" every year. In addition to buying long-term government bonds (which the Fed did in QE2), Japan's central bank is going to buy stock and real estate. This is exactly the sort of reflationary policy that Miles Kimball recommended as a cure for depressions, back when I took his macro class. In any case, the move is very very big. George Soros says that the BOJ's plan is "three times as big" as the Fed's attempts at QE. People from big banks and research companies are saying much the same thing.

Anyway, so Abe defied my expectations and really implemented a serious policy change. Now, we get to see how well monetary policy really works, in an economy with a deflationary trap and well-anchored deflationary expectations. A dramatic (though uncontrolled) natural macroeconomic experiment is being carried out in Japan - probably the biggest thing since Volcker whipped U.S. inflation in the early 80s.

IF monetary policy works - i.e. if it can raise inflation in a controlled manner while boosting output - it's not only a huge win for Japan - which needs moderate inflation to erode its mountainous debt, and could probably use an employment boost too - but also for New Keynesian and monetarist type macroeconomics, which generally holds that a central bank has the tools to control the rate of inflation (or to beat any depression). A failure would mean either an uncontrolled "inflation snap-up", or a failure to budge Japanese expectations and prices. A majority or plurality of top macroeconomists probably believes in some sort of monetarism, so hopes are high. I'm a little bit more agnostic, and I'm excited to see what happens.

So, Mr. Abe (or "Shinzo" as I somewhat cheekily called him in a recent interview on a Japanese website)...you convinced me. Excellent job. Now let's see if you can convince me again with structural reform and the TPP!