As Japan gears up for an election which could provide it with its seventh change of prime minister in six years, governments and economists from elsewhere in the developed world are looking East for a clue to the long-term consequences of loose monetary policy.
After decades of stagnant economic growth, or shrinkage, a quarter of tax revenues in Japan goes toward just servicing its debt. A gross government debt to gross domestic product ratio of 220 percent last year made it much the worst indebted of the G7 nations which dominate the global economy.
"Japan serves as a warning — but they do muddle along," David Rea, Japan economist at Capital Economics, told CNBC. "We are still a long way from Japan's situation in Europe and the US."
Japan's current government has announced several different stimulus packages in recent months, none of which seem to have been well received enough to give them the support necessary to win the election.
The latest deal, announced last week, was described by Rea as "just another mish-mash of measures linked together."
The role of the Bank of Japan (BoJ) also has potential for change — and to serve as a warning sign for other central banks. The opposition Liberal Democratic Party (LDP), led by Shinzo Abe and currently leading the opinion polls, has made several statements suggesting that if it triumphed on the Dec. 16 election day, the BoJ would be made to raise its inflation target to 2 percent from 1 percent.
The existing looseness of the Bank's monetary policy stance means it may be difficult for an incoming government to make significant changes.
"What really matters is what the BoJ is willing to do in order to avoid a change in its legal status," Steven Englander, global head of G10 currency strategy at Citi, said. "Globally the relationship of central banks to finance ministries has evolved from 'open marriage' to the central banks having complete independence as long as they do exactly what finance ministries want them to do."
The BoJ has been criticized for being "too timid" attacking Japan's deflation problem, according to Paul Robinson, global head of foreign-exchange research at Barclays.
Capital Economics also pointed out that the current approach is "not much different" to the US Federal Reserve policy.
Economists at Citi and Capital Economics warn of a sharp fall in the value of yen in the next three to five years, which could help stimulate Japan's exports, but on the other hand may reduce the value of the savings of Japan's aging population.
Demographics also provide a warning signal to the West, where the long-term decline in birth rates continues. There is now more spent on adult diapers than the child's version in Japan, according to retailer Unicharm — a signal of how the population is not replacing its workforce.
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