Timing the key in Japan's massive gamble to revive the economy

After two "lost decades", Japan has begun a risky monetary gamble. Abenomics has the potential to make or break Japanese savings, the Asian century and global recovery.

When the Bank of Japan concluded its highly anticipated two-day policy meeting on April 4, a new era began in Japan. As the conservative caution of the previous BOJ governor Masaaki Shirakawa faded into history, his successor Haruhiko Kuroda pledged to do "whatever it takes" to achieve the 2 per cent inflation target. The great gamble has begun.

Last December, the Liberal Democratic Party returned to leadership with Shinzo Abe as its prime minister. The LDP campaigned on a three-pillar platform of renewed fiscal stimulus, aggressive monetary easing from the BOJ and structural reforms to boost Japan's competitiveness.

The sheer anticipation of change in Japan has resulted in a sharp depreciation of the yen and an equally steep rise in stock prices. The consensus forecast for gross domestic product growth in 2013 and 2014 is now around 1.5 per cent.

Recently, the BOJ also pledged to begin open-ended asset buying, seeking to inject US$1.4 trillion into the economy within two years. It hopes to double the monetary base to 270 trillion yen (HK$19.6 trillion) by the end of 2014.

However, by targeting the monetary base, the BOJ has effectively abandoned interest rates as a target. As tax revenues have failed to cover for government expenditures in Japan, life support has become a way of life. Economic activity is sustained through excessive deficit spending. In the process, Japanese governments have piled up debt valued at US$14.6 trillion, which translates to a whopping 230 per cent of annual GDP. Yet, Japan pays less than 1 per cent interest - less than Germany.