South-Western College Publishing - Economics  
Follow the Fiscal Road to Recovery
Subject Fiscal Policy
Topic International Finance
Key Words Fiscal Policy, Recession, Economic Growth
News Story

Japan's economy is in recession. It has been in recession for two years despite initial attempts to stimulate the economy by lowering interest rates and reducing taxes. Japan's latest attempt at recovery relies heavily on increased spending - a 5.3 percent increase for general spending. The U.S. and other nations have been putting pressure on Japan to put its economy back on track, especially since a Japanese recovery would provide a boost to the ailing Asian economies. Japan's proposed budget for the fiscal year starting in April is an effort by Prime Minister Keizo Obuchi to fulfill his promise to achieve economic growth in the year 2000.

Japan's Ministry of Finance announced a proposed $706 billion budget for the fiscal year ending in March 2000. The proposed budget calls for a significant boost in government spending of 5.3 percent, excluding debt payments and grants to local governments. This is a significant turn-around from this year's budget which contained a 1.3 percent contraction. Public works spending in the proposed budget will grow 10.6 percent compared with a 7.8 percent reduction this year.

The increased government spending will put Japan deeper into fiscal debt. The government will have to sell a record $618 billion in bonds -- including $269 billion in new bonds next year -- to finance the proposed spending. Tax revenues are forecasted to decrease next year because of depressed economic activity and proposed tax cuts. Bond sales will also be needed to cover these revenue shortfalls.

(Updated January 1, 1999)

Questions

1. What are the objectives of fiscal policy?
2. What parts of the U.S. government are responsible for the implementation of fiscal policy?
3. Suppose the government decided to implement an expansionary fiscal policy. What are some policies it might implement? How would these policies impact the U.S. economy?
4. Draw an aggregate supply/aggregate demand diagram showing the Japanese economy in a recession. Show on this diagram the impact on real GDP and the price level of the proposed increase in Japanese spending.

Source Bloomberg News, "Japan Oks Draft Budget With Boost in Spending", Los Angeles Times, December 21, 1998

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