2003 Reports

Choices for Japanese fiscal policy

Inoue, Kengo; Harvey, David

This essay will attempt to make a critical assessment of the debate and to put Japanese fiscal policy into some sort of perspective. In doing so, we look at specific arguments by focusing on the following five headings which are examined in turn. (Note, however that point 5 is such a major issue in itself that it has been discussed in a separate paper written by the author3.) (1) Has the effectiveness of fiscal policy been permanently eroded in recent years compared with earlier periods? (2) Does the neutrality theorem -which states rational people react to government fiscal policy in a way that offsets the policy thrust-apply in Japan? (3) Is the Japanese fiscal position so precarious that priority should be give to reducing the deficit? (4) Can there be any means to improve the way public expenditures are allocated? (5) Does an expansive fiscal policy delay necessary structural adjustments?