IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Fiscal Consolidation in Japan

  • FUKAO Mitsuhiro
Registered author(s):

    In order to maintain the stability of its financial system, Japan must control its budget deficit by continuing with a contractionary fiscal policy. Ideally, the negative effects of a tight fiscal policy should be countered with an expansionary monetary policy. However, the effectiveness of the conventional interest-rate policy has been diluted by the zero lower bound of interest rates. Prime Minister Shinzo Abe asked the Bank of Japan to set a 2% inflation target to be achieved in two years through a massive quantitative easing of the monetary base. In this paper, we first review Japan's macroeconomic performance since the collapse of the asset-price bubble in the late 1980s. Next, we make a long-term projection of Japan's fiscal balance by estimating the macro production function for Japan. We also estimate the required increase in the government's tax revenues under a few scenarios. After presenting a possible fiscal crisis scenario, we evaluate the effectiveness of quantitative easing and highlight its limitations. Thereafter, we propose some measures to consolidate budget deficits under a deflationary environment in order to avoid such a crisis. Some policy options include a combination of a gradual increase in indirect taxes and a reduction in payroll tax. In order to overcome the zero lower bound of nominal interest rates, the introduction of the Gesell tax has also been proposed. By levying a tax on the outstanding amount of government-guaranteed financial assets including cash, it is possible to set a negative nominal return on safe assets.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Paper provided by Research Institute of Economy, Trade and Industry (RIETI) in its series Discussion papers with number 14015.

    in new window

    Length: 27 pages
    Date of creation: Apr 2014
    Date of revision:
    Handle: RePEc:eti:dpaper:14015
    Contact details of provider: Postal: 11th floor, Annex, Ministry of Economy, Trade and Industry (METI) 1-3-1, Kasumigaseki Chiyoda-ku, Tokyo, 100-8901
    Phone: +81-3-3501-1363
    Fax: +81-3-3501-8577
    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Mitsuhiro Fukao, 2003. "Financial strains and the zero lower bound: the Japanese experience," BIS Working Papers 141, Bank for International Settlements.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eti:dpaper:14015. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (NUKATANI Sorahiko)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.