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Japan May Stop Dragging on Global Growth, Finally

Benoist Sébire | Flickr | Getty Images

Now that Japan has unveiled bold steps to end years of deflation, the world's third largest economy can at last stop being a laggard and start making a positive contribution to global growth, analysts tell CNBC.

The Bank of Japan (BOJ) on Tuesday doubled its inflation target to 2 percent and made an open-ended pledge to pump trillions of yen into the economy by buying government bonds and other assets from next year after its current asset-buying program ends.

There was some disappointment in markets that the BOJ did not go far enough. Still, hopes are growing that the measures will break Japan out of a cycle of falling prices and anemic growth – something that can only be good news for a world economy trying to get back on track in wake of the global financial crisis.

(Read More: Did Bank of Japan Just Kill the Dollar-Yen Rally?)

"You have this country, Japan, that contributes 10 percent to the world's GDP (gross domestic product) but has been in recession every 2-3 years with its average economic growth constrained," said Shane Oliver, head of investment strategy and chief economist at AMP Capital in Sydney.

"So now with the reflation policies, we're moving into a world where Japan avoids a recession every couple of years and average growth is going to be 1.5 percent or so and you get a boost to global growth that just wasn't there before," he added.

Japan's economy has contracted for two quarters running, pushed into a recession by weak global demand for its exports. It has been in a technical recession five times in the past 15 years. And for much of the past 20 years, prices have fallen, discouraging spending and contributing to a moribund economy.

A new government, led by Prime Minister Shinzo Abe, came to power in elections in December and has pledged to revive the economy, piling pressure on the central bank to pursue an aggressive monetary policy. It also unveiled a $117 billion stimulus package earlier this month to give the economy a short-term boost.

(Read More: Japan Unveils Stimulus- Don't Get Too Excited Yet)

The International Monetary Fund on Wednesday raised its 2013 GDP forecast for Japan by about 0.5 percent to 1.2 percent because of the fiscal measures.

"Japan is contributing again to global growth. After falling into recession we see brighter prospects this year for Japan," Jorg Decressin, deputy director, research department at the IMF told CNBC Asia's "Squawk Box" on Thursday.

AMP's Oliver said the BOJ's policy steps and the impact they have on the global economy also need to be seen in the context of brighter growth prospects as the U.S. and Chinese economies rebound and worries about a debt crisis in the euro zone ebb.

"The importance is that it (the BOJ announcement) comes at a time when things are looking a bit healthier, the U.S. housing recovery is getting underway, risks surrounding Europe are receding, China's economy is looking a bit better," he said.

Down to Action

Analysts said one reason for persistent deflation in Japan was a half-hearted policy response by the BOJ, which has had a reputation of acting cautiously. A serious effort now to reflate Japan's economy gives reason to be optimistic, they add.

"After sitting on two decades of stagnation in Japan, the BOJ is finally getting down to what it needs to do, so I think it's only a matter of time before Japan works itself out of its malaise," Jack Bouroudjian, CEO at Bull and Bear Partners, a Chicago-based wealth management firm, told CNBC.

Until Tuesday's announcement, the BOJ had pledged to pump 101 trillion yen ($1.1 trillion) into markets via its asset-purchase program. From next year, the BOJ will buy 13 trillion yen in assets every month.

The more aggressive monetary stimulus that will be provided by Japan's central bank just adds to the boost markets have received from the Fed asset-buying, analysts said.

The U.S. Federal Reserve last September launched a third round of quantitative easing or asset purchases and in December the central bank said it would continue to buy $85 billion in Treasury securities and mortgage-backed securities every month until the jobs market recovers.

"We have a concerted effort by central bankers to prevent a seizure of our economies, just like we had in 2008. Now what we're looking at with Japan entering the fray is a real concerted effort that we didn't have before," Bouroudjian added.

Contact World Economy

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