South-Western College Publishing - Economics  
Pumping Yen
Subject Fiscal Policy
Topic International Finance
Key Words Budget Deficit, Gross Domestic Product, Fiscal Policy, Economic Expansion, Recession
News Story

Japan has recently emerged from its longest post-World War II recession aided, in part, by eight major fiscal stimulus packages adopted by the Japanese government in the last decade. The economy is now expanding but the expansion is shaky. To keep the economy in an expansion, Prime Minister Keizo Obuchi just announced another stimulus package calling for about $171 billion in initiatives. About $67 billion will be in direct new spending. The new package also contains loan guarantees for construction and property companies.

The Prime Minister has called his fiscal initiatives an "economic rebirth package" meant to ensure continued Japanese prosperity in the next century. Obuchi's plan provides for increased spending on public works, primarily in the area of transportation infrastructure. The package also calls for efforts to promote growth in high-tech firms and to broaden access to the Internet. Japan's stock market reacted favorably to the package with the Nikkei index reaching a 26-month high.

Many economists worry that Japan's increased use of deficit spending will bring huge future costs and lead to the kind of problems that the U.S. experienced in the 1980s. If this plan fails to keep the economy moving, Japan will have few alternatives available. Japan has a staggering debt to gross domestic product (GDP) ratio of 118 percent.

Some analysts believe the recently announced stimulus package will maintain the Japanese economic expansion with growth of about 1 percent by the end of Japan's fiscal year, March 2000, and growth of 2 percent by March 2001. Japan's own forecasts call for 0.6 percent expansion by the end of this fiscal year. The consensus forecast is somewhere between the two.

(Updated December 1, 1999)

Questions
1. This article discusses the use of fiscal policy in Japan. How is fiscal policy determined in the United States? Who are the agents responsible for determining the amount of the stimulus?
2. Using an aggregate demand/aggregate supply diagram, illustrate the position of an economy experiencing a recession. Indicate on your diagram the extent of the recessionary gap. Show on the diagram the effects of a fiscal stimulus package on real GDP and the price level.
3. The article focuses on fiscal policy. What is the role of monetary policy in this situation? What could the monetary authorities do to support the government's fiscal policy?
Source Clay Chandler and Akiko Kashiwagi, "Japan's Government Primes Economic Pump Again;" The Washington Post, November 11, 1999.

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