Japan is fighting back at stagnation Abenomics has already gained some ground in the attack on deflation, writes Taro Aso Now that the Bank of Japan has fired a monetary bazooka at deflation, people are asking "what's next" for Abenomics, our drive to revive Japan's economy. The challenges are serious. Ours is the only country in the postwar era to suffer from deflationary stagnation. Since the bubble economy burst in the early 1990s, we have struggled through two "lost decades." Deflationary expectations are entrenched, discouraging investment in the future and eating away at the economy. Wages, consumption and investment are sluggish. The key insight of Abenomics is that deflation cannot be destroyed by one bazooka. That is why we are firing three: bold monetary policy, flexible fiscal policy and a growth strategy to overcome stagnation. The inspiration is Franklin Roosevelt's leadership during the Depression and, before him, Korekiyo Takahashi, a Japanese finance minister in the 1920s and 1930s, whose stimulus policies are said to have been a model for Roosevelt's. Markets have felt the blast of the first bazooka. Haruhiko Kuroda, the new governor of the Bank of Japan, has already announced "quantitative and qualitative monetary easing." The BoJ will double Japan's already expanded monetary base, taking all imaginable measures to achieve 2 per cent inflation in about two years. The policy pushed long-term interest rates to record lows. The second bazooka - flexible fiscal policy - seeks to create private demand. Our supplementary budget for 2012 is expected to boost real gross domestic product by about 2 per cent. Tax reform will provide practical benefits for entrepreneurs, undertaking investment and raising wages. Tax changes will encourage companies to mobilise hoarded cash for capital and human investment. Economic sentiment - as well as the stock market - has improved dramatically since Shinzo Abe, our prime minister, took office in December. Abenomics has already gained some ground in the attack on deflation; some companies have raised wages in response to dialogue with the government. This momentum must now be turned into a recovery. So we must address risks associated with the first phase: the risk of "bad inflation" and "bad" rises in interest rates. Price rises unaccompanied by growth would cut real incomes and hurt public welfare. That is "bad inflation." To avoid this requires the third bazooka: a strategy to maximise our economic potential. I believe that Japan's potential is great. Some industries have been hit hard by competitors elsewhere in Asia, but Japan is still blessed with overwhelming advantages in many strategic areas, from linear-motor trains to water supply systems. Finding our hidden strength and changing our mindset is needed for Japan to regain true competitiveness. Japan plans to join negotiations over the trans-Pacific Partnership trade agreement; that could be a good opportunity for the country to find its hidden strength. Bold deregulation and policies inducing innovation are also needed for internal reform. In many big Japanese companies, success in the past led to inflexibility and risk aversion. Strengthened corporate governance may be needed to change the way they do business and facilitate open innovation. A smooth transfer of resources, including labour, to growing sectors is essential for enhancing productivity. Gains in employment and wages are essential for sustainable growth. The second risk, of a "bad" rise in interest rates, could materialise if monetary easing is not accompanied by fiscal consolidation. That is not our plan. With public debt now more than 200 per cent of GDP, policy makers have a sense of urgency about this issue. There was bipartisan support last summer for an unpopular rise in the consumption tax. We stand by our international commitment to fiscal consolidation. Japan will halve its primary deficit by 2015 and resolve it by 2020. I intend to raise the consumption tax, as scheduled. The broader vision of Abenomics is to create a society where people who are willing to work are offered opportunities and are rewarded fairly. Such a society will emphasise advanced technology and innovation, rather than mass production and price competition. The revival of Japan will be beneficial to the rest of the world, since it is also a process of evolution into a mature economy that can build win-win relationships with its economic partners. The writer is finance minister of Japan and a former prime minister