After a couple decades of near-zero growth, Japan finally elected a government that promised to get the hell out of the so-called “liquidity trap” (low growth coupled with low interest rates) by raising the inflation target from 1% to 2%.  Did it work?  Well…

Lars Christensen:

This is yet another very strong prove that monetary policy can be extremely powerful. The graph also shows the importance of the Chuck Norris effect – monetary policy is to a large extent about expectations or as Scott Sumner would say: Monetary Policy works with long and variable leads – or rather I believe that the leads are not very long and not very variable if the central bank gets the communication right and I believe that the BoJ is getting the communication just right so you are seeing a fairly strong and nearly imitate impact of the announced monetary easing.

PS As there tend to be a quite strong positive correlation between earning growth and nominal GDP growth I think we can safely say that the sharp increase in earnings expectations in Japan to a large extent reflects a marked upward shift in NGDP growth expectations.

Pretty clearly we don’t need the fiscal stimulus that Krugman, DeLong, and others have been agitating for.  There is no such thing as a liquidity trap, only ineffective central banking policies.

The “Chuck Norris effect” is a great way to understand why “expectations uber alles” in monetary policy.  If Chuck Norris says “I am going to beat up everyone in Room A who doesn’t move to Room B” then he may not actually have to beat anyone up in order to move everyone to Room B.  The Fed can generally move policy wherever it wants within the bounds of its credibility simply by giving guidance.

Time for the US to emulate Japanese policy?  I feel like it’s the 1980s all over again.

(h/t Scott Sumner)