South-Western College Publishing - Economics  
It Ain't Over 'Til It's Over
Subject Recession
Topic Productivity and Growth
International Finance
Key Words Recession, Gross Domestic Product, Economic Growth
News Story

Japan had been in a recession for about two years, and the Japanese government tried a variety of stimulative measures to induce economic recovery. The economy expanded modestly in the first and second quarters of 1999 and Japanese authorities thought that their policies had caused an economic turnaround. However, the economy contracted during the July-September quarter by 3.8 percent and the head of Japan's Economic Planning Agency just announced that economic growth in the fourth quarter is expected to also be negative. Two consecutive quarters of negative growth means that Japan's recession has resumed.

Japanese Prime Minister Keizo Obuchi came to power in 1998. His economic program relied upon massive government spending program to turn the economy around. The ratio of debt to gross domestic product (GDP) increased to 130%, the highest of any major industrialized nation. After five consecutive quarters of contraction, the economy increased by a modest 1.5% in the first quarter and another 1.5 % in the second quarter. Authorities believed that their spending program had rekindled spending and stimulated growth to the point where economic growth would be self-sustaining. As a consequence they abated their spending in the third quarter. The authorities were wrong - the economy contracted by 3.8%. The Japanese government continued to provide upbeat assessments of the strength of the economy; however, sluggish consumer spending resulting in part from a reduction in worker bonuses was responsible for what will likely be a fourth quarter decline.

(Updated March 1, 2000)

Questions
1. Illustrate, using aggregate demand/aggregate supply diagrams, the impact of an increase in government spending on real GDP and the aggregate price level to an economy that has a recessionary gap.
2. Now assume that the government withdraws its spending. What happens to real GDP and the price level?
3. The Japanese government had hoped that increased government spending would stimulate consumer spending and business investment. How do induced changes in consumer spending and business investment affect GDP?
4. What are some measures that the Japanese government could take to stimulate the economy?
Source Clay Chandler, "Japanese Economy Shrinks Again," The Washington Post, February 7, 2000.

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