Reversal of fortune: Macroeconomic policy, International Finance, and Banking in Japan
the determinants of price expectations. Hori and Shimizutani in their paper, “Price 70
Expectations of Japanese Household: Evidence from Original Survey Data” take 71
advantage of an original household-level data set to examine the factors that affect 72
price expectations, and explore how changes in price expectations can affect 73
household consumption. Their study confirms that deflationary expectations dis- 74
courage household consumption. At the same time, it seems clear that the Bank of 75
Japan’s repeated announcements of an easing of monetary policy did little to 76
change household price expectations. Only 5% to 10% of the households in the 77
Kokumin Seikatsu Monitor data set revised upwards their price expectations in 78
response. This certainly suggests that the expansionary Japanese monetary policy 79
advocated by Hamada and Noguchi labors under special handicaps. 80
2.3 A role for fiscal policy? 81
Hamada and Noguchi stress that there is a consensus among Japanese economists 82
that monetary policy is the key to Japanese recovery. While, as will be seen, there 83
are certainly exceptions to this view in Japan, in the United States quite a number of 84
influential economists have taken the position that expansionary fiscal policy also 85
has a role to play (Kuttner and Posen 2001; Hubbard 2002; Borda and Weinstein 86
2004). Ihori and Nakamoto in “Japan’s Fiscal Policy and Fiscal Reconstruction” 87
take exception to this view. Extending their earlier VAR analysis with more recent 88
data, they find no evidence that an increase in public investment or a tax cut has 89
much of expansionary impact.2 Indeed, in the 1990s some crowding out of a 90
private investment is observed. In addition, there seems to be some evidence, given 91
Japan’s massive deficit and large outstanding public debt, that fiscal tightening, 92
rather than undermining aggregate demand, led to an increase in consumption, 93
though the magnitude is small. 94
While Ihori and Nakazato reject any role for expansionary fiscal policy, unlike 95
Hamada and Noguchi, they do see deregulation and structural adjustment, and with 96
it decline in prices in particular goods and services, as capable of promoting 97
Japanese recovery. Indeed, they find deregulation capable of having a substantial 98
greater macroeconomic impact than fiscal policy. 99
2.4 Gesell Taxes and Eisler Taxes 100
An expansionary monetary policy may be necessary to promote the Japanese 101
recovery, but it is possible such policies may not be sufficient. In the presence of 102
deflation, the inability to push nominal interest rates below zero may leave real 103
interest rates too high at this stage of Japan’s business cycle to call forth the rate of 104
investment required to assure a return Japan to full employment. Mitsuhiro Fukao 105
in “The Effects of ‘Gesell’ (Currency) Taxes in Promoting Japan’s Economy” 106
proposes a number of measures to cope with this problem. In particular, he argues 107
that the Bank of Japan should raise its price level target from zero to 1.4% per 108
annum as measured by the core consumer price index with a margin of error of plus 109
2 See Saxonhouse and Stern (2003) for a comparison of Kuttner and Posen (2000) with Ihori
et al. (2003).