If Japan's Economy Recovers, It Could Settle One Of The Most Important Questions In All Of Economics

The talk today is about Japan.

That's in part because the stock market just hit a brand new 5.5 year high. It also comes amid increasing evidence that domestic demand is picking up, thanks to a new slew of stimulus measures, which combined are known as "Abenomics."

If the domestic economy comes roaring back to life, it will help settle one of the most important questions in economics: Can monetary stimulus be effective, when interest rates are at zero? Economists talk about the challenges of the "Zero Lower Bound" all the time.

In an interview with Business Insider last December, Goldman Sachs chief economist Jan Hatzius states:

...one of the big lessons that we’ve taken away from the past few years is that the zero lower bound on nominal short-term rates is a really big deal because it does get quite a bit more difficult for central banks to provide stimulus once you’ve hit that zero bound.

If what Japan is doing (aggressive inflation targeting + quantitative easing) works to stimulate the real economy, it will be a strong point in favor of the idea that the Zero Lower Bound is not an iron barrier that makes monetary policy less effective, but rather a point where Central Bankers must merely show more creativity and determination to keep easing.

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