Reversal of Fortune: Macroeconomic Policy, International Finance, and Banking in Japan

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).

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