Economist: What to Do If The Usual Weapons Fail: "If the usual weapons fail, there are plenty of new policy responses for governments to turn to. From the robots that help care for an ageing population to holographic pop stars, the future always arrives early in Japan. Economic policy is no exception. When the massive Japanese financial bubble of the 1980s imploded, the Bank of Japan (BOJ)... tested many of the policies, such as QE, that would enter the toolkit of other central banks during the financial crisis. Yet Japan was seen as an example of central-bank incompetence, until smug Western central banks discovered after 2008 that getting an economy to perk up when interest rates were near zero was harder than it looked...
...Since the election of Shinzo Abe in 2012, Japan has reprised its pioneering role. Mr Abe replaced the head of the central bank and promised to reflate the economy. The BOJ supercharged its asset purchases; its balance-sheet grew from about 40% of gdp in 2012 to 100% now. It bought not just government bonds but corporate debt, shares in equity exchange-traded funds and in property investment trusts. It announced a yield target of 0% on ten-year government bonds, in effect extending the rate control central banks have long exercised over short-term rates to very long maturities. Japan’s efforts offer just a sample of the unconventional tools available to governments when rate cuts and QE disappoint. When the next recession strikes, Japan-like interventions might mark only the first foray into an uncharted policy landscape....
Recessions occur where there is too little spending to keep an economy’s resources from falling idle. Economists have spent the past decade thinking up ways to boost spending and escape recession when interest rates are at zero, as they almost certainly will be during the next global slump. But these proposals, while promising, are largely untested. Those which have been tried, as in the experiments in Mr Abe’s Japan, have delivered mixed results. Given uncertainty about how and whether experimental policies work, an effective global response to the next downturn will need to be bold, sustained and co-operative. It will hinge, in other words, on what political decisions are made. But if the menu of recession-fighting options is longer than ever, politicians have rarely seemed less eager to co-operate, across party lines or borders, to produce good economic policy.
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