The Role of Public Works in the Political Business Cycle and the Instability of the Budget Deficits in Japan* (original) (raw)

The Current State of the Japanese Economy and Remedies*

Asian Economic Papers, 2002

Japan has reached the limits of conventional macroeconomic policies. Lowering interest rates will not stimulate the economy because widespread excess capacity has made private investment insensitive to interest rate changes. Increasing government expenditure in the usual way will have small effects because it will take the form of unproductive investment in the rural areas. Cutting taxes will not increase consumption because workers are concerned about job security and future pension and medical benefits. Expanding the monetary base will not induce banks to increase investment loans because the proportion of nonperforming loans in their portfolios is growing because of the prolonged economic stagnation. In order for sustained economic recovery to occur in Japan, the government must change the makeup and regional allocation of public investments, resolve the problem of nonperforming loans in the banking system, improve the corporate governance and operations of the banks, and strengthen the international competitiveness of domestically oriented companies in the agriculture, construction, and service industries.

Sustainability, Debt Management, and Public Debt Policy in Japan

2006

The purpose of this paper is to analyze sustainability issues of Japan's fiscal policy and then to discuss the debt management policy using theoretical models and numerical studies. We also investigate the desirable coordination of fiscal and monetary authorities toward fiscal reconstruction.

Japan at the Crossroads - State Budget Remains the Achilles' Heel

The natural and nuclear disaster on the 11th of March 2011 pulled Japan into a renewed recession. Projected on the annual basis, the gross domestic product nosedived by 3.5% in the first quarter of 2011. Indeed the consequences of the earthquake, tsunami and subsequent nuclear disaster will be very noticeable for the remainder of the year with regard to economic development. However, initial signs of a rebound have begun to appear in the meantime. Extensive public spending programs are currently sustaining the demand. Prior to the earthquake, the public debt was already approximately 200% of the gross domestic product and was rising rapidly. The government must harmonize duties, responsibilities and financial conditions; otherwise its room to maneuver in times of more "extreme events" decreases. Thus the Japanese government faces a dilemma: Increasing the tax burden, which is low when compared internationally, will have a negative impact on economic development. Fiscal con...

Fiscal Sustainability in Japan

Asia & the Pacific Policy Studies, 2016

Japanese government debt is at unprecedented levels with a gross debt to gross domestic product ratio of over 230 per cent and a net debt to gross domestic product ratio of 150 per cent. There are three big challenges to fiscal sustainability: the huge amount of government bonds outstanding; continued budget deficits; and the growing age-related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s, there is every likelihood that the Japanese economy will muddle through.

Effectiveness of Fiscal Expansion in Japan(本文)

2014

iv primary-deficit-to-GDP ratio raises real 10-year interest rates by 26-34 basis points. However, the increases in the projected deficit are found to be more significant than the current deficit. In addition, we find that the current government debt to GDP ratio raises the rates by only 1.2 basis points at the most. These results suggest that the projected deficit is important than the current deficit and that budget deficits have larger effects than government debt, which are consistent with Feldstein (1986). Moreover, using factorial decomposition based on estimation result in the current deficit case, we estimate that the real budget deficit in 2008 causes an approximately 2 to 3% increase in the JGB yields, which reduces the real GDP by 0.39 to 0.63 percentage points in 2008. Chapter 2 2 explores the possibility of the existence of non-Keynesian effects in Japan. The effectiveness of fiscal stimulus has received significant research attention since the collapse of the global financial services firm Lehman Brothers. Although most studies agree on the existence of Keynesian multiplier effects, several studies also demonstrate the existence of non-Keynesian effects. What explains the lack of consensus in the current body of literature? In this thesis, we aim to bridge the two views by estimating a near-vector autoregressive (near-VAR) system that includes the interaction terms of fiscal instruments with the debt-to-GDP or the primary-deficit-to-GDP ratios. Moreover, to embed the dynamics of the debt-to-GDP ratio in the analysis, we follow Favero and Giavazzi (2007) and explicitly incorporate the government budget constraint. Our results are as follows: First, we find that the impulse response functions (IRFs, hereafter) of the government expenditure shock show the Keynesian features in general; however, the effects of tax increases on the GDP are Ricardian. This is not rare in fiscal VARs, however, as shown in Hebous (2011). Second, the primary-deficit-to-GDP ratios are statistically effective as the signal of fiscal condition, but the debt-to-GDP ratios are not. Finally, when we derive the IRFs for GDP by changing the initial values of the quarterly primary-deficit-to-GDP ratio from 0.000 to 0.015 and 0.03, the non-Keynesian features emerge in both the government expenditure case and the tax revenue case. In short, we conclude that an increasing primary-deficit-to-GDP ratio gives rise to non-Keynesian effects. Chapter 3 3 investigates the causes of changes in the effectiveness of fiscal stimuli in Japan. Numerous studies have pointed out that the effects of these expenditures have diminished since around the 1990s. However, none of these studies has statistically explored the reasons for this diminution. The purpose of this study is to statistically investigate these reasons, using a threshold vector autoregression (VAR), in which the causes pointed out in the literature are adopted as the threshold. If the null hypothesis that the estimated parameters are equal under each regime is rejected,

Japanese Macroeconomic Dilemmas

wlu.edu

Japan's post-WWII baby boom and the subsequent drop in fertility resulted in a series of sharp demographic transitions. The macroeconomic impact is large. Due to labor force changes, growth in the 1990s would in any event have been in the range of 1-2%, little better than actual performance; poor monetary and fiscal policy are secondary in importance. Demographic changes also led to swings in domestic savings and investment balances and in the flow-of-funds among sectors. With hindsight it should not be surprising that policymakers made major blunders or that financial institutions incurred large losses attempting to adapt to swings in the structure of their balance sheets. Finally, Japan now faces the demographic transition to an old-age society, from a starting point of large fiscal deficits and with a large stock of government debt. Restoring fiscal sustainability on top of the need to increase revenues to cover age-related transfers will require net taxes to increase by 19% of GDP. Accomplishing that will be a major political and administrative challenge and will inevitably hold growth below its 1% potential level during the coming decade.

Restoring Japan's Fiscal Sustainability

OECD Economics Department Working Papers, 2013

Restoring Japan's fiscal sustainability With gross government debt surpassing 200% of GDP, Japan's fiscal situation is in uncharted territory. In addition to robust nominal GDP growth, correcting two decades of budget deficits requires a large and sustained fiscal consolidation based on a detailed and credible multi-year plan that includes measures to control spending and raise revenue. On the spending side, reforms to contain ageing-related outlays are the priority, while the consumption tax should be the main source of additional revenue, given that its impact on economic activity is less negative than other taxes. The plan should target a primary budget surplus large enough to stabilise the public debt ratio by 2020. The fiscal policy framework should be improved to help reinforce confidence in Japan's fiscal position and prevent a run-up in interest rates. Higher consumption taxes should be accompanied by well-targeted social spending, including the introduction of an earned income tax credit, to prevent a rise in inequality and poverty.

Japan's Fiscal Policies in the 1990s

The World Economy, 2003

This paper first summarises Japan's fiscal policies in the 1990s. Then, we investigate the macroeconomic impact of government debt and the sustainability problem. We find that the Keynesian fiscal policy in the 1990s was not effective and fiscal sustainability may therefore become a serious issue. We also estimate the optimal level of deficits and evaluate fiscal reconstruction movements. It is shown that the actual deficit exceeded the optimal level in the late 1990s. We then inspect fiscal reconstruction movements in the Hashimoto Administration in 1997 and find that the major factor of recession in 1997 was not fiscal consolidation. An important lesson from Japan's fiscal policies in the 1990s is that long-run structural reform is more important than short-run Keynesian policy.

Challenges to Revitalizing the Japanese Economy

2005

In this forecast, we examine the future Japanese economy to FY2015. Major assumptions made in the forecast are: The world economy will grow by about 4%, oil prices would drop to $28/barrel, and the yen would gradually appreciate by about 10%. In other words, the terms of trade that have deteriorated significantly this fiscal year will gradually look better. We also assume that to recover sustainability of government finances, the consumption tax rate will be raised by 3 percentage points in FY2008, and 2 in FY2013. Under these assumptions, the Japanese economy should be able to attain growth of about 2%. In the first term of the forecast period (FY2004-2006), the slowdown in the economy will not be enough of a " recession " to mark lower growth than the potential growth rate, and the economy will recover in FY2006. This is because the overseas economies will support the economy, lower oil prices will help improve the terms of trade and corporate profits will improve quite ...

Sustainability of Public Debt: Evidence from Pre-World War II Japan

Discussion Paper Series, 2007

Japan defaulted on its public debts only once throughout its modern history, after World War II (WWII). How did Japan lose its ability to sustain its public debts? This paper explores the sustainability of public debts in Japan before and during WWII. First, this paper reviews the brief history of pre-WWII public finance in Japan with reference to some narrative evidence, data, and previous works. Second, this paper conducts three stages of econometric analyses. It tests Ricardian neutrality of public debt. It tests the dynamic efficiency of Japanese economy, and it conducts Bohn's tests for the relationship between public debt and primary fiscal balance. The tests indicate that Japanese public debts were sustainable until 1931, and unsustainable in and after 1932. Third, this paper interprets the results of quantitative analyses with narrative modes of analysis. During the 1930s, Japan lost its fiscal discipline because of the military's effective veto over budgetary processes and because of the absence of pressure for sound fiscal policy from international financial markets. JEL Classifications: E62, H63, N15 1 I would like to thank Takero Doi, Eisaku Ide, Yoichi Matsubayashi, Ryuzo Miyao, Richard Smethurst, and participants in the Kinki Workshop of SocioEconomic History Society of Japan, the Rokko Forum and RIEB Seminar at Kobe University, and the Seminar at the Bank of Japan, for their helpful comments and discussions. Any remaining errors are my own.