Taking stock of Japan's faltering recovery, 2 years after launch of monetary 'bazooka'

TOKYO – Two years after launching a bazooka of ultra-lavish monetary easing, Bank of Japan Gov. Haruhiko Kuroda has made only fitful progress toward the goal of the 2 percent inflation rate he and Prime Minister Shinzo Abe said was needed to jolt the world's No. 3 economy out of its deflationary rut.

Kuroda increased central bank purchases of assets last fall and splashed still more cash on the economy last autumn, but faces mounting pressure to open the taps further. The central bank left that policy unchanged following a meeting that ended Wednesday.

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THE POLICY: Just after taking his post in April 2013, Kuroda announced the central bank would vastly expand its purchases of government bonds and other assets, keeping interest rates near zero and seeking to push inflation toward a 2 percent target within two years. The idea was to convince consumers and businesses to spend more money, sooner, to beat price increases. Meanwhile, the government promised to increase public works spending and carry out sweeping reforms to counter stagnation and fading competitiveness.

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THE PROGRESS: Kuroda and Abe can claim significant progress in boosting share prices and corporate profits, largely thanks to a weakening in the yen, which increases the value of overseas earnings of major companies. The unemployment rate has fallen to 3.5 percent and companies have begun raising wages, but at a pace too slow to keep up with even modest price increases.

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THE PROBLEM: So far, the anticipated rebound in consumer spending and corporate investment has not taken hold, despite a surge in purchases ahead of an April 1, 2014 sales tax hike. The tax increase triggered a brief recession and growth since has been flat. Inflation is still at about 0 percent, when the impact of the 3 percentage point tax hike is excluded. In addition, falling oil prices are reducing energy costs, keeping prices from rising faster.

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THE POLITICS: Fortified by an overwhelming parliamentary majority and the absence of a credible opposition challenge, Abe pledged to "drill down into the bedrock" of Japan's labyrinthine bureaucracy, streamline logistical bottlenecks, foster innovation and loosen protectionist policies that favor inefficient industries such as farming and health care. Such changes may be necessary in the long run but will likely take years.

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THE PROGNOSIS: Japan's population of 127 million peaked in 2010 and is aging very quickly, especially in rural and remote regions, where entire communities are vanishing as young people move away. Japanese companies are reluctant to invest in the domestic market given those harsh demographic realities. But some economists argue that this resource-scarce country should accept that trend and use it to its advantage to improve living standards by shifting to a less growth and manufacturing-oriented economic model.

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POSSIBLE RISKS: Thanks to lavish spending, a weakening tax base during two decades of stagnation and soaring pension and social benefits costs for its aging population, Japan has a bigger national debt relative to its economy than even Greece. Most of that debt is held domestically, not owed to foreigners, and is not considered high-risk. But there are limits to how much money the central bank can print and spend without spooking investors, and Japan faces strong pressure to shape up its national finances. In the meantime, the poverty rate has been rising as growing numbers of employees fall into the "precariate" — contract workers on low wages, with scant or no social benefits and minimal if any savings. Any recovery would not be sustained without a rebound in purchasing power across a broader part of the population.