Japanese Prime Minister Yasuo Fukuda’s call for a stimulus package carries ominous echoes of Japan’s 1990s public spending. Rising imported commodity costs have pushed the country towards recession, so reducing them would help.
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Japan’s gross domestic product, or GDP, rose 1.3% in the year to March 2008. According to a survey by The Economist magazine, it is expected to grow 1.4% in 2008 and 1.3% in 2009. Industrial production fell 2% in June; it was up 0.2% in the year to June. Consumer price inflation was 2% in the year to June. Japan’s current account surplus was 4.1% of GDP in the year to June, and its budget deficit is expected to be 2.7% of GDP in 2008.
Japan’s public spending rose from 31.5% of GDP in 1991 to 38.1% in 2000. The result was public debt of 170% of GDP and sluggish economic growth, as wasteful government projects consumed resources. After 2001, then prime minister Junichiro Koizumi brought public spending under control. This produced declining government deficits and renewed economic growth.
Fukuda said on 4 August that he did not envisage introducing a supplementary budget to produce fiscal stimulus. However, with an election due in 2009 and pressure for higher spending strong, the dangers of fiscal backsliding are great. That would slow growth and cause public debt to spiral.
Since Japan relies heavily on imports of foods and energy, its growth has been depressed and its inflation rate increased by the rise in global commodity and energy prices.
Japan’s own monetary policy, however, is excessively expansionary, with the Bank of Japan locked into a 0.5% policy interest rate. Further, Japan’s high savings base and ageing population mean modestly higher interest rates would provide a net stimulus to Japanese economic growth, while tending to reduce commodity prices and incipient inflation. Japan’s need is, thus, not fiscal stimulus but monetary tightening, both at home and globally. It seems unlikely to get it on either front.