SINCE THE PERSISTENCE OF Japan's economic stagnation first became apparent, the Japanese government has been offered a flood of advice from macroeconomic policy analysis. Much of this advice emanated from the official sector, most prominently from the U.S. Treasury and the International Monetary Fund (IMF), but a host of academics were likewise generous in their recommendations. (1) Yet both the degree to which Japan has followed this advice and the effects of the macroeconomic policies undertaken remain in dispute. Economic commentators and other observers of Japan have split over whether standard Keynesian policies were tried and failed, whether the policies implemented had the expected effects but were offset by other factors, or whether some of the recommended policies (monetary expansion, in particular) never were seriously tried at all. After the longest period of below-potential growth for any developed economy since World War II--what we and others have termed the Great Recession--with no end in sight, it is worth asking what lessons there are for macroeconomic policy from Japan. Japan's experience since the burst of its stock market bubble in December 1989 constitutes a critical experiment for the effectiveness of macroeconomic policy on several grounds. First and foremost, Japan's unprecedentedly persistent shortfall of demand raises the obvious question of whether countercyclical policies had any beneficial effects, if such policies were implemented and Japan has not yet recovered. Second, the argument has often been made, although not by macroeconomists, that the Japanese economic system is somehow special, not subject to the same rules and economic logic as Western economies; if largely the same macroeconomic policy prescriptions are to be offered universally, whether or not they work in Japan is an important test case. Third, the unvarying nature of Japan's institutional structures (a topic of much criticism from advocates of structural reform) provides a unique opportunity to assess the impact of monetary and fiscal policies in the absence of other major changes in the economic environment. On more specific issues there are also questions of real concern. As has often been observed, monetary policy in Japan today confronts a disabled banking system, the zero bound on nominal interest rates, and arguably a liquidity trap, forcing us to reexamine the efficacy of the quantity channels of monetary policy transmission. As for fiscal policy, Japan in the last decade can be seen as a case in which fiscal stimulus should have been either very effective or largely ineffective: effective because of the relatively closed economy, the reluctance of savers to move money abroad, and the vast quantities of private household savings available; ineffective because of the wastefulness of public works projects, the looming demographic threat posed by an aging population, and the rapid and obvious rise in public debt. Thus Japan represents a crucial test of the Ricardian versus the Keynesian approach to fiscal policy. Finally, that same disabled banking system, which has now limped along for a decade without resolution of its bad loans, allows us to consider the nonmonetary effects of financial fragility on the real economy when banks are not allowed to fail outright. Thus the purpose of this paper is to establish the record and assess empirically the effects of macroeconomic policies undertaken in Japan in response to the Great Recession. Discussions of Japan's macroeconomic policies have all too often suffered from lack of empirical rigor. Some have been based on simplistic, uncontrolled analyses, observing, for example, that the economy has faltered despite growing fiscal deficits, and concluding from this that fiscal stimulus has failed. Others have relied on comparisons with other countries' experiences, for example in discussing what a central bank might do if faced with a liquidity trap, or simply appealed to abstract (and untested) economic principles. …

/pdf/the-great-recession-lessons-for-macroeconomic-policy-from-3x5qematj6.pdf

The Great Recession: Lessons for Macroeconomic Policy from Japan

The effectiveness of fiscal policy in Japan over the past decade has been a matter of great controversy. We investigate the effectiveness of Japanese fiscal policy over the 1976–1999 period using a structural VAR analysis of real GDP, tax revenues, and public expenditures. We find that expansionary fiscal policy, whether in the form of tax cuts or of public works spending, had significant stimulative effects. Using a new method of computing policy multipliers from structural VARs, we calculate that the multiplier on tax cuts is about 25% higher at a four-year horizon than that on public works spending, though both are well in excess of one. A historical decomposition reveals that Japanese fiscal policy was contractionary over much of the 1990s, and a significant proportion of the variation in growth can be attributed to fiscal policy shocks; accordingly, most of the run-up in public debt is attributable to declining tax revenues due to the recession. Examining savings behavior directly, we find limited evidence of Ricardian effects, insufficient to offset the short-term effects of discretionary fiscal policy. J. Japan. Int. Econ., December 2002, 16(4), pp. 536–558. Federal Reserve Bank of New York, New York, and Institute for International Economics, Washington, DC. © 2002 Elsevier Science (USA).

Journal of Economic Literature Classification Numbers: E62, E65, E21.

Fiscal Policy Effectiveness in Japan

The efficacy of fiscal policy in Japan in the last decade has been a subject of considerable dispute, and the coincidence of mounting deficits and continued stagnation has led some to conclude that fiscal policy was ineffective. This paper finds ample support for the opposite conclusion: exogenous fiscal policy shocks (as derived from a structural vector-autoregression model) had pronounced real effects in Japan. Expansionary fiscal policy was expansionary, and contractionary policy contractionary, consistent with the implications of conventional macroeconomic theory. A historical decomposition shows that Japan's burgeoning public debt stems almost entirely from the recession-caused slowdown in revenue growth, and that fiscal policy was at times procyclical rather than consistently expansionary. Direct examination of the long-run relationship between private saving, taxes, and spending confirms that any Ricardian effects of future public liabilities on saving were insufficient to offset the direct first-order effects of taxes and public expenditures. The passivity of Japanese savers therefore seems to have contributed to the efficacy of fiscal policy; otherwise, some combination of increased saving, capital outflow, and higher interest rates would have diminished its impact.

/pdf/passive-savers-and-fiscal-policy-effectiveness-in-japan-5avu1cbx6p.pdf

Passive Savers and Fiscal Policy Effectiveness in Japan

Although neoliberalism seems diametrically opposed to the Developmental State ideology at first glance, actually-existing Developmental States in East Asia have vigorously applied neoliberal logic to their planning policy during the last two decades. This paper follows Japan’s neoliberal planning strategy between 1980 and 2007, analyzing its rationale, practice, and impacts on society. The impacts of Japan’s neoliberal reforms remind us that the market economy requires a significant amount of state supervision and regulatory controls to protect the public from the kind of risk it generates. Furthermore, Japan’s experience also illustrates how the concept of “risk” is not neutral in policymaking.

Neoliberalism, risk, and spatial governance in the developmental state: Japanese planning in the global economy

.......................................................................................................................... iii ACKNOWLEDGEMENTS ..................................................................................................... v TABLE OF CONTENTS ....................................................................................................... vii LIST OF TABLES .................................................................................................................. xi LIST OF FIGURES ................................................................................................................ xi LIST OF BOXES .................................................................................................................... xi LIST OF ABBREVIATIONS .............................................................................................. xiii Chapter

/pdf/the-significance-of-creativity-in-urban-governance-and-2fjfowp8tk.pdf

The significance of creativity in urban governance and regeneration practice through the lens of an institutional capacity framework

Making Fiscal Policy in Japan is written for those who want to understand the role and performance of fiscal policy as an integral component of macroeconomic policy, and the attendant effects on economic growth. The case explored here is post-Second World War Japan, but the approach is one of international comparison. Ishi traces and analyses the central features of postwar Japanese fiscal policy and considers the institutional framework and policy objectives which shaped the budget process. The first part of the book provides a detailed overview of the topic, with detailed institutional and empirical information. In particular, the role that government played in Japan's postwar economic growth is explored in depth, with specific focus on the four sub-periods of occupation, rapid economic growth, internationalization, and the bubble economy. Part II explains the basic framework of budgets, the budgetary process in Japan, and fundamental strategies of fiscal authority. It looks in depth at the unique aspects of the balanced budget policy for 1953-65 and then at how financial resources for budgeting were automatically generated in a growing economy. The final part analyses specific policy issues in the public sector, among them human resource development, the ageing population and the social security system, tax incentives for export promotion, the Fiscal Investment and Loan Programme, and intergovernmental grant policy. Ishi argues that the Japanese government has been generally passive in guiding the state's economic activities, using fiscal policy to support the private economy rather than directly to influence the economy through deliberate expenditure and tax policies. The approach has been one of enhancing the market rather than of government intervention.

Hiromitsu Ishi

Papers

Making Fiscal Policy in Japan: Economic Effects and Institutional Settings

Making Fiscal Policy in Japan: Economic Effects and Institutional Settings