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Japan Prime Minister's Toughest Test

By Elaine Kurtenbach, AP Business Writer

TOKYO -- Prime Minister Shinzo Abe is about to find out that bending central bankers to his will was the easy part of jolting Japan's economy out of its two decade slump.

Since taking office late last year, Abe has sauntered from strength to strength, ticking off the boxes of his policy wish-list while enjoying popularity ratings several times those of his predecessors.

On Thursday, his Liberal Democratic Party claimed its biggest coup since its December parliamentary election win when the central bank surprised markets by overhauling its monetary policy, pledging to double the money supply to achieve a 2% inflation target within two years.

The central bank acted "as I had expected," Abe told parliament Friday. "This is truly bold monetary easing on a different level, sending a clear message to markets."

By joining the U.S. Federal Reserve and other major central banks in soaking the economy with money, the Bank of Japan hopes to get corporations and consumers to begin spending more and end a long malaise.

More aggressive monetary easing to end years of deflation is a mainstay of the "Abenomics" platform, along with increased public spending to perk up demand and reforms to improve the long-term competitiveness of the world's third-largest economy.

Whatever deficit spending Japan dares to add to its record public debt already is in the pipeline. Abe has also committed to rebalancing the budget.

Now, attention is turning to the toughest part of Abe's program: reforms to make aging Japanese industries and markets more competitive, loosen bottlenecks, and unleash pent-up dynamism and innovation.

Ever since its "Miracle Economy" bubble imploded over 20 years ago, Japan has failed to regain momentum despite lavish government spending and record low interest rates.

Abe's effort to turn the economy around has so far translated into a multimonth rally in the stock market. Investors reacted to the BOJ announcement by pushing the benchmark Nikkei 225 index to its highest level in more than four years Friday.

The Japanese yen, meanwhile, quickly weakened to 96 yen to the dollar, from around 92 -- in line with Abe's push for a weaker currency that can help make Japanese exports more price competitive in overseas markets, while also raising import costs.
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