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Stock price targeting and fiscal deficit in Japan: Why did the fiscal deficit increase during Japan’s lost decades?

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  • Fukuda, Shin-ichi
  • Yamada, Junji

Abstract

The purpose of this paper is to explain why Japan’s fiscal deficit increased so dramatically in the 1990s and the 2000s. We focus on the role of “stock price targeting” to explain why the fiscal expenditure increased so much. After presenting a simple model to describe government behavior with an optimistic view about stock price and output growth, the paper tests whether the model can explain Japan’s fiscal expenditure. The empirical results, using biannual and high-frequency data of the 1990s and the 2000s, show that the stock price targeting can track Japan’s fiscal expenditure reasonably well, especially in the 1990s. They imply that without the stock price targeting, the total amount of biannual fiscal stimulus from 1992 to 2000 would have been lower by 2.5 trillion yen on average.

Suggested Citation

  • Fukuda, Shin-ichi & Yamada, Junji, 2011. "Stock price targeting and fiscal deficit in Japan: Why did the fiscal deficit increase during Japan’s lost decades?," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 447-464.
    • Handle: RePEc:eee:jjieco:v:25:y:2011:i:4:p:447-464
    DOI: 10.1016/j.jjie.2011.10.001
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    2. Hiroshi Morita, 2017. "Effects of Anticipated Fiscal Policy Shock on Macroeconomic Dynamics in Japan," The Japanese Economic Review, Springer, vol. 68(3), pages 364-393, September.
    3. Takao Fujii & Kazuki Hiraga & Masafumi Kozuka, 2012. "Analyses of Public Investment Shock in Japan: Factor Augmented Vector Autoregressive Approach," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-006, Keio/Kyoto Joint Global COE Program.
    4. Morita, Hiroshi & 森田, 裕史, 2019. "Forecasting Public Investment Using Daily Stock Returns," Discussion paper series HIAS-E-88, Hitotsubashi Institute for Advanced Study, Hitotsubashi University.
    5. Kato, Ryuta Ray & Miyamoto, Hiroaki, 2013. "Fiscal stimulus and labor market dynamics in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 33-58.
    6. Hiraga, Kazuki & Kozuka, Masafumi & Miyazaki, Tomomi, 2018. "Public capital and asset prices: Time-series evidence from Japan," Finance Research Letters, Elsevier, vol. 25(C), pages 172-176.
    7. Kengo Nutahara, 2013. "Asset Price Targeting Government Spending and Equilibrium Indeterminacy in A Sticky-Price Economy," CIGS Working Paper Series 13-003E, The Canon Institute for Global Studies.
    8. Shin-ichi Fukuda & Naoto Soma, 2021. "Evaluation of Japan’s Macro-Fiscal Policy and its Challenges," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 17(2), pages 1-28, November.
    9. Muhammad Shafiullah & Usman Khalid & Sajid M. Chaudhry, 2022. "Do stock markets play a role in determining COVID‐19 economic stimulus? A cross‐country analysis," The World Economy, Wiley Blackwell, vol. 45(2), pages 386-408, February.
    10. Tomomi Miyazaki & Kazuki Hiraga & Masafumi Kozuka, 2018. "Stock Market Response to Public Investment under the Zero Lower Bound: Cross-industry Evidence from Japan," Working Papers 171806, University of California-Irvine, Department of Economics.
    11. Yoshida, Motonori, 2023. "Chronological changes of government sectors’ fiscal policies and fiscal sustainability in Japan," Japan and the World Economy, Elsevier, vol. 66(C).
    12. Etsuro Shioji, 2017. "Extracting fiscal policy expectations from a cross section of daily stock returns," UTokyo Price Project Working Paper Series 077, University of Tokyo, Graduate School of Economics.
    13. Hiroshi Morita, 2017. "Effects of Anticipated Fiscal Policy Shock on Macroeconomic Dynamics in Japan," The Japanese Economic Review, Japanese Economic Association, vol. 68(3), pages 364-393, September.

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    More about this item

    Keywords

    Fiscal deficit; Government spending; Stock price;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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