Transcript Macroeconomic Policy in Japan

Macroeconomic Policy Options
for Japan
Warwick J McKibbin
Economics Division RSPAS/APSEM
Economic Problems in Japan
• Poor macroeconomic management
• Structural rigidities in non traded sectors
• Banking system bad debts
Is it Feasible for Macroeconomic
Policy to work in Japan?
• Shorter term
– Monetary Policy
– Fiscal Policy
– Trade Policy
• Longer term
– Kyoto Protocol
– Demographic transition
What can be done
• Monetary Policy
– Announce an inflation target
– Pursue expansionary monetary policy by first
having the BoJ print yen to buy government
debt then purchase as many assets as possible
until inflationary expectations rise
What can be done
• Fiscal Policy
– Announce a substantial phased fiscal
consolidation financed by cutting government
expenditure
– Cuts of 5% of GDP phased over 3 year
– Abolish the consumption tax immediately and
reintroduce in 1 year
What will happen?
• Monetary stimulus will raise output through
– a fall in real interest rates ( a rise in expected
inflation)
– A depreciation of the yen
What will happen?
• Credible fiscal contraction will initially
lower output but raise it in future years
through
– Lower long term real interest rates and
– A depreciation of the Yen
• Temporary cut in consumption tax will
make current consumption attractive
Some results from
“Macroeconomic Policy in
Japan”
paper presented to Harvard Asian Economic Panel September
2001
Fig 3a: Real Effects on Japan of a Credible 3% Inflation Target
1
% GDP deviation from baseline
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
0
1
2
3
GDP
4
5
6
Consumption
7
8
Investment
9
10
11
Fig 6a: Real Effects on Japan of a Phased Fiscal
Consolidation of 5% of GDP in Japan
4
% GDP deviation from baseline
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
0
1
2
3
4
5
6
7
8
-1
-1.5
GDP
Consumption
Investment
9
10
11
Will this work?
• If no effect of inflation target as some
would argue then might as well try
• If big effect of inflation target as I and
others argue then might as well try
• The fiscal adjustment is critical to do now
given the demographic transition
What else is needed?
• A variety of policies
–
–
–
–
Structural reform
Banking reform
Trade Liberalization
Not the Kyoto Protocol
• But none of these will work well without
sensible macroeconomic policies
Will this Happen?
• Probably not without a serious crisis
• A serious economic crisis need not occur in
Japan for a very long time
Background papers
WWW.SENSIBLEPOLICY.COM
WWW.NOTWRONG.COM