Japan leads to way

Bloomberg:  Japan’s Abe Unveils 10.3 Trillion Yen Fiscal Stimulus: Economy

"The extra spending will increase gross domestic product by about 2 percentage points and create about 600,000 jobs, the government said...A pick-up in China’s inflation reported today highlighted a rebound in Asia’s biggest economy that may aid efforts by the newly elected Abe to lead Japan out of its third recession in five years. The stimulus may heighten concern that the government’s commitment to fiscal reform is slipping, adding to the risk that a public debt more than twice the size of the economy may trigger a surge in bond yields...In Japan, the central bank is set to adopt the 2 percent inflation target advocated by Abe, doubling its existing goal of 1 percent, without setting a deadline for achieving it, according to people familiar with central bank officials’ discussions...Japan’s GDP shrank at an annualized 3.5 percent pace in the third quarter after contracting in the three months through June, meeting the textbook definition of a recession. The median estimate of economists surveyed by Bloomberg News is for a 0.6 percent contraction in the three months through December 2012, with growth in the three months to March seen at 1.6 percent. "

Abe's plan seems to be more than traditional Keynesian demand side stimulus.  It is true that Japan is certainly sitting at the ZLB (zero lower bound for interest rates) so fiscal stimulus should be effective here.  However this plan seems to lean on the Woodford / Evans mechanism (see here and here and here) of growth though increased inflation expectations.  By promising to run a larger deficit and directing the BOJ to increase the inflation target Abe hopes to change the private sector's expectations about not only how the economy will perform in the short term but how the BOJ will react in the future if inflation increases.  Its not quite nominal GDP targeting but it is moving in that direction.