Japan Strategies to Reduce Inflation and Correlations to U.S. Economy. Thoughts of the Days Just Before and After 9-11.

It is asked, to ask the questions that come to mind after reading both of these stories, and answer those questions, with or without whether an analysis is necessary to do so:

Story 1, published by the NY Times this yesterday:
http://www.nytimes.com/2013/04/05/business/global/japan-initiates-a-bold-bid-to-end-years-of-falling-prices.html?pagewanted=1&ref=world

Japan Initiates Bold Bid to End Years of Tumbling Prices

Story 2, written in September 2002:
http://www.fas.org/irp/crs/RL31617.pdf

Report for Congress
Received through the CRS Web

The Economic Effects of 9/11:
A Retrospective Assessment

 
Highlights of story 1:
Japan Initiates Bold Bid to End Years of Tumbling Prices
April 4, 2013

TOKYO — Haruhiko Kuroda, the new governor of the Bank of Japan, delivered on his promise to drastically change Japan’s economic policy to end a long, debilitating era of deflation.

The central bank said it had inflated the economy by aggressively buying longer-term bonds and doubling its government bond holdings in two years. The bank said it would aim to create a robust 2 percent inflation rate “at the earliest possible time.”

Some economists were cautious, though. The central bank’s giant purchases of government debt could eventually be seen by investors as enabling runaway public spending, quashing confidence that Japan would ever pare its already sky-high public debt. They also said it could also drive up long-term interest rates.

Others argue that rising prices, once stoked, can be hard to control, a fear related to memories of Japan’s bubble economy of the 1980s and the subsequent painful collapse.

In a statement detailing the new measures, the bank said it would buy longer-term government bonds, lengthening the average maturity of its holdings to seven years from three years and expanding Japan’s monetary base to 270 trillion yen by March 2015.

Under that plan, the bank will buy about 7 trillion yen in bonds each month, equivalent to over 1 percent of its gross domestic product, which is almost twice the bond purchases of the United States Federal Reserve Bank.

 
Highlights of story 2:
The Economic Effects of 9/11:
A Retrospective Assessment
September 27, 2002

International Capital Flows and the Dollar
While international trade plays an important role in the U.S. economy, it is not the only role played by international forces. A characteristic of the economic
expansions of the 1980s and 1990s was the large net inflow of foreign capital to the United States. During the late 1990s, this net inflow furnished between one-third and one-half of the U.S. net saving. In times of international crisis and uncertainty, foreign capital has often sought refuge in the United States. This time, however, the United States is the battle ground. Even though there was no panic selling of dollar-denominated assets after 9/11, it would appear that there was a short run decline in the net purchase of U.S. assets by foreigners. This was clearly over by mid-October.
However, this may be due to timely action of the Federal Reserve, which restored confidence in the smooth functioning of the nation’s payments system, action supporting the dollar in international financial markets by the Bank of Japan and the European Central Bank, among others, and interest rate cuts by key central banks in support of similar cuts by the Federal Reserve. [[aprxmtly. page] CRS-3]

Prior to 9/11, the slowdown in the U.S. economy already was being transmitted to other economies through trade and investment channels, particularly through a sharp decline in U.S. imports of high-technology components from Asian suppliers.
The aftershocks of the terrorist attacks were felt immediately in foreign equity markets, in tourism and travel, in consumer attitudes, and in temporary capital flight from the United States. Central banking authorities worldwide reacted by injecting liquidity into their financial systems.
Still, the downturn in business conditions became more generalized, and the world has had to rely on China and the United States – the only two major economies to register significant growth – to pull itself out of the recession. By and large, however, the sharp immediate drop in stock values, airline travel, and general consumer confidence was temporary. After a few months, most began to turn upward again, but what recovery has occurred has been fragile and difficult to sustain.
The recession, along with increased government spending for the antiterror campaign, contributed to rising federal debt in the United States and other nations.
Combined with a weakening dollar that pushed up the exchange value of the yen, Euro, Chinese renminbi, and other currencies, central governments intervened to bolster the value of the dollar by purchasing more U.S. debt instruments. A side effect of this activity is that, despite Japan’s weak economy, its holdings of U.S. Treasury securities continue to rise ($321.0 billion by May 2002). China also has become a major foreign holder ($80.9 billion) of U.S. debt. [[apr. page] CRS-19]
 
The Bank of Japan intervened in foreign currency markets on five instances between September 11 and September 27 by buying dollars to stop the rise in the value of the yen. These efforts were undermined partially by
Japanese firms that were repatriating some U.S. holdings to shore up their
cash balances to meet financial reporting deadlines on September 30.
37[suprscrpt.]  [[page] CRS-25]
 
Since 9/11, in particular, stock market values in the United Kingdom, Germany, France, Canada, and Japan have tended to move in tandem with those in the United States (as measured by the S&P 500). [[apr. page] CRS-19]

Looking to the Future
In the aftermath of 9/11, it appears that the international economy has currently become a one-locomotive world. Only United States – with some help from China – has had the size and strength to provide the economic stimulus to world economies necessary to help pull them out of the global recession. Japan and Western Europe remained coupled to the U.S. business cycle and have remained dependent on exports for economic recovery rather than relying upon domestic fiscal and monetary policies. The limited recovery in their domestic sectors has been too weak and unsteady to counter the global downturn. For U.S. policymakers, therefore, actions to restore health to the American economy also may determine global economic conditions. In this sense, foreign and domestic economic interests coincide. [[apr. page] CRS-22]