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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
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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
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