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Macroeconomic Policy in Japan

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  • Warwick J. McKibbin

    (Research School of Pacific and Asian Studies The Australian National University Canberra, ACT 0200 Australia, and The Brookings Institution Washington, D.C.)

Abstract

This paper explores the composition of the macroeconomic policy packages that would be effective in stimulating the Japanese economy. An empirical econometric model is used to predict the consequences of a monetary stimulus consisting of an open-market purchase of government bonds by the Bank of Japan combined with the announcement and implementation of inflation targeting in Japan. The paper also compares the impacts of permanent, temporary, and phased fiscal adjustments. The model predicts that monetary policy would be effective in stimulating the Japanese economy through causing a depreciation of the yen. Similarly, a substantial fiscal consolidation in Japan would be only mildly contractionary for the first two years but then would yield substantial long-term benefits to the Japanese economy. Combining a credible fiscal contraction that is phased in over three years with an inflation target would be likely to provide a powerful macroeconomic stimulus to the Japanese economy, through a weaker exchange rate and lower long-term real interest rates, and would sustain higher growth in Japan for a decade. Thus, a switch in the macroeconomic policy mix toward a loose monetary policy (e.g., setting inflation targets between 2 and 3 percent) and a tight fiscal policy is likely to be an important part of a successful package of reforms to raise Japanese productivity growth over the coming years. Copyright (c) 2002 Center for International Development at Harvard University and Massachusetts Institute of Technology.

Suggested Citation

  • Warwick J. McKibbin, 2002. "Macroeconomic Policy in Japan," Asian Economic Papers, MIT Press, vol. 1(2), pages 133-165.
  • Handle: RePEc:tpr:asiaec:v:1:y:2002:i:2:p:133-165
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    Cited by:

    1. Fritz Breuss & Andrea Weber, "undated". "Economic Policy Coordination in the EMU. How Much Scope will There be Within the Framework of the Stability and Growth Pact?," WIFO Working Papers 113, WIFO.
    2. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, pages 363-384.
    3. Jürgen von Hagen & Susanne Mundschenk, 2002. "The Functioning of Economic Policy Coordination," Chapters,in: EMU and Economic Policy in Europe, chapter 7 Edward Elgar Publishing.
    4. Fritz Breuss & Andrea Weber, 1999. "Economic Policy Coordination in the EMU: Implications for the Stability Pact," EUI-RSCAS Working Papers 26, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
    5. Christopher Bajada, 2001. "An Examination of the Statistical Discrepancy and Private Investment Expenditure," Journal of Applied Economics, Universidad del CEMA, vol. 4, pages 27-61, May.
    6. Takatoshi Ito, 2004. "Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?," RBA Annual Conference Volume,in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    7. Gottfried Haber, 2001. "Simulation Analysis of Public Debt and Fiscal Deficit in Austria – Optimal Economic Policies for the Past and the Future," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, pages 69-95.
    8. Reinhard Neck & GOTTFRIED Haber & WARWICK Mckibbin, 2004. "European Monetary and Fiscal Policies after the EU Enlargement," Economic Change and Restructuring, Springer, pages 229-245.
    9. Warwick J. McKibbin & Jeffrey D. Sachs, 1989. "The McKibbin-Sachs Global Model: Theory and Specifications," NBER Working Papers 3100, National Bureau of Economic Research, Inc.
    10. Liu, Zheng & Pappa, Evi, 2005. "Gains from international monetary policy coordination: does it pay to be different?," Working Paper Series 514, European Central Bank.
    11. Massimo Giuliodori & Roel Beetsma, 2005. "What are the Trade Spill-Overs from Fiscal Shocks in Europe? An Empirical Analysis**," De Economist, Springer, pages 167-197.
    12. Dominick Salvatore, 1998. "International Monetary and Financial Arrangements: Present and Future," Open Economies Review, Springer, pages 375-416.
    13. Kapetanios, G. & Pagan, A. & Scott, A., 2007. "Making a match: Combining theory and evidence in policy-oriented macroeconomic modeling," Journal of Econometrics, Elsevier, pages 565-594.
    14. Warnock, Francis E & Cleaver, Chad, 2003. "Financial Centres and the Geography of Capital Flows," International Finance, Wiley Blackwell, pages 27-59.
    15. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, pages 171-199.
    16. Dominick Salvatore, 2000. "The Present International Monetary System: Problems, Complications, and Reforms," Open Economies Review, Springer, pages 133-148.
    17. Zheng Liu & Evi Pappa, 2005. "Gains from Coordination in a Multi-Sector Open Economy: Does it Pay to be Different?," Working Papers 296, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    18. Canale Rosaria Rita & Foresti Pasquale & Marani Ugo & Napolitano Oreste, 2008. "On keynesian effects of (apparent) non-keynesian fiscal policies," Politica economica, Società editrice il Mulino, issue 1, pages 5-46.
    19. Reinhard Neck & Gottfried Haber, 2006. "Macroeconomic policy and EMU enlargement," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 7(4), pages 17-21, December.
    20. Liu, Zheng & Pappa, Evi, 2008. "Gains from international monetary policy coordination: Does it pay to be different?," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2085-2117, July.
    21. Levine, Ross, 1990. "Stock markets, growth, and policy," Policy Research Working Paper Series 484, The World Bank.
    22. Reinhard Neck & GOTTFRIED Haber & WARWICK Mckibbin, 2004. "European Monetary and Fiscal Policies after the EU Enlargement," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, pages 229-245.
    23. Warwick J. McKibbin & David Vines, 2003. "Changes in Equity Risk Perceptions: Global Consequences and Policy Responses," Departmental Working Papers 2003-15, The Australian National University, Arndt-Corden Department of Economics.
    24. McKibbin, Warwick J. & Wilcoxen, Peter J., 2013. "A Global Approach to Energy and the Environment," Handbook of Computable General Equilibrium Modeling, Elsevier.
    25. Canzoneri, Matthew B. & Cumby, Robert E. & Diba, Behzad T., 2005. "The need for international policy coordination: what's old, what's new, what's yet to come?," Journal of International Economics, Elsevier, pages 363-384.

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