South-Western College Publishing - Economics  

A Jolt for Japan
Subject International Economics
Topic International Trade and Finance; Industrially Advanced Countries
Key Words Japan, Stagnant Economies, Stimulus Package, Asian Economy, Budget Deficit
News Story

Japan's economy has been stagnant. To revive the economy the ruling Liberal Democratic Party has proposed a $124 billion stimulus program. Included in the stimulus package are increased public-works spending, a plan to extend postal savings to the stock market, securitization and disposal of real-estate collateral for bad loans, loans to alleviate the credit crunch, and public investment in the environment and in energy.

Noticeably missing in the package is a tax cut proposal. Cutting taxes is controversial in Japan. Last year Prime Minister Hashimoto raised taxes and cut spending in an effort to cut the government's budget deficit. Partly as a result of these measures, Japan's economy slipped even further to the point where many expect the economt to slip into recession. If Mr. Hashimoto were to reverse himself and push for a tax cut it would be an admission that last year's deficit reduction measures were a mistake. Admitting to this mistake might cost Mr. Hashimoto his job.

The United States and other countries were pushing Japan to stimulate its economy. Asia's economic turmoil threatens to throw the region and possibly the world into recession, and a reinvigorated Japanese economy might prevent this.

Although the details of Japan's stimulus package need to be presented, there already is criticism that perhaps half of the proposed measures are not growth-enhancing and therefore the actual stimulus is less than the advertised $124 billion. The U.S. had wanted Japan to include a tax cut in their package in order to provide stimulus. (Updated May 19, 1998)

Questions
  1. How do tax revenues and expenditures typically behave when the economy is in recession?
  2. What is the impact of additional spending on the government's budget deficit? On aggregate demand? On real GDP?
  3. Is there any difference between the use of added government spending to stimulate the economy and lowering taxes as the stimulus measure?
Source David P. Hamilton, "Japan Rolls Out Vast Plan to Spur Economy," The Wall Street Journal, March 27, 1998.

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