Fiscal Consolidation in Japan
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.
|Date of creation:||Apr 2014|
|Contact details of provider:|| Postal: 11th floor, Annex, Ministry of Economy, Trade and Industry (METI) 1-3-1, Kasumigaseki Chiyoda-ku, Tokyo, 100-8901|
Web page: http://www.rieti.go.jp/
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.:
- Mitsuhiro Fukao, 2003.
"Financial strains and the zero lower bound: the Japanese experience,"
BIS Working Papers
141, Bank for International Settlements.
- Mitsuhiro Fukao, 2006. "Financial Strains and the Zero Lower Bound: The Japanese Experience," NBER Chapters, in: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 203-232 National Bureau of Economic Research, Inc.
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 references are entirely missing, you can add them using this form.