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3 reasons why it's different for Japan this time

April 11, 2013: 10:56 AM ET

Japan has repeatedly tried to revive its economy, but investors might just buy it this time around.

Japan prime minister Shinzo Abe

Japan prime minister Shinzo Abe

FORTUNE – Japan has struggled to keep its standing as the world's third-largest economy. For the past 15 years, it has been plagued by falling prices, making it the only major economy to undergo prolonged deflation since the Great Depression. Over the years, the government has tried to reboot the economy to what it once was, only to disappoint investors and the public repeatedly.

This time, it's different under "Abenomics," the term coined to describe policy prescriptions launched by Japan's new prime minister Shinzo Abe. Last week, the central bank announced an aggressive plan to buy $75 billion of bonds a month. The hope is that this would send interest rates lower, giving people and businesses an incentive to borrow and spend more. It's also hoped the move would weaken the yen, which would allow struggling manufacturers to sell their goods and services cheaply to the rest of the world.

There are, of course, some serious risks: Japan's government debt is extremely high. If the program doesn't work, Japan would fall deeper in the money hole. There's also the risk that it could create asset bubbles around the world. And if prices rise too rapidly ahead of Japan's already low wages, it would make everyone worse off.

Japan has embarked on easing monetary policies several times before, but the move this time is unprecedented. Here are three reasons why:

Investors believe in a turnaround

Japan has repeatedly tried to fix its economy, but efforts never really went anywhere. The banks bought up government bonds and helped drive down interest rates, but critics say those plans were too timid and confusing. They didn't encourage many people and businesses to borrow and spend more.

This time, officials have set out a clearer plan -- complete with when and how it expects to raise inflation to 2%. Over the next two years, the Bank of Japan expects to double the country's money supply by buying debt and more exotic securities like ETFs. What's more, the bank lifted a restriction for buying longer-term securities, which signals to investors that it's in it for the long haul.

MORE: In China, a little bit of financial chaos is just fine

"The new leadership is shaking up expectations," says Mireya Solis, a professor at American University and senior fellow at Brookings Institution. Solis, an expert on Japan's foreign economic policies, adds that this makes all the difference.

The goals are indeed ambitious. Even Abe acknowledged that hitting the 2% target before the deadline in two years could be difficult. Nonetheless, the level of clarity he provided lets investors know what to expect, which in turn, helps them plan when and how much they can borrow.

They're not just throwing money at the problem

Abe's plan to reboot Japan's economy doesn't stop with a bond-buying bonanza. Many say its economy is over-regulated, and the bounty of rules limiting the flow of business has kept the country from better times.

Knowing this, Abe has made structural reform, such as deregulation, the so-called "third row" of his "Abenomics" plan to revive the economy. While talks are ongoing, discussions have centered around loosening employment rules to make it easier to shed workers, overhauling electric power utilities, deregulating medical and child care records, and promoting use of the Internet.

To be sure, much of Japan's two decades of meager growth were also marked by promises to deregulate the economy. While some were kept, many were not. It remains to be seen what Abe might bring to the table, but it's a good sign that Japan recognizes reviving the economy doesn't rest only with an aggressive bond-buying program.

A neighbor to follow

Now that it's clear the U.S. is likely not falling into a Japan-style lost decade, Japan has signaled it wants to follow its Western neighbor  and catch up with its growth strategies, said Jesper Koll, director of Japan equity research at J.P. Morgan, in a March report.

Not that the U.S. doesn't have its own problems, but the Federal Reserve's aggressive bond-buying program has helped the country avoid another recession. "If nothing else, the regime change at the Bank of Japan indicates a newfound vigor to follow the Fed-led model of pro-growth stimulus focused in monetary policy."

MORE: Current fiscal policy harms U.S. competitiveness

For instance, Japan has been eager to join negotiations for the Trans-Pacific Partnership, a free-trade pact with the U.S. and other Pacific nations. Abe sees it as Japan's last chance to remain an economic power in Asia and shape the region's future.

Japan is notorious for burdensome regulations over everything from retail to health to autos that shut out foreign competitors. The partnership would eliminate such barriers to trade -- something proponents and Abe say could turn Japan's economy around.

Abe still faces opposition from farmers and other influential groups, however. And it remains to be seen if he could overcome that with his popularity.

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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