South-Western College Publishing - Economics  
Is the Sun Rising?
Subject Recession, Economic growth

International Finance
Fiscal Policy

Key Words Fiscal Policy, Recession, Economic Growth
News Story

Japan's economy has been very weak these past few years, alternating between recession and very modest growth. Economic data for Japan's Gross Domestic Product (GDP) indicate a 2.4 percent increase in the total output of goods and services for the first quarter of this year. This upturn follows six months of decline including a decrease of 1.6 percent in the previous quarter. If the economy continued expanding at this pace the rest of the year, GDP would increase 10 percent in 2000. The question for analysts is whether this upturn is an indication of a sustainable recovery or just another turn in the growth and contraction cycle that has plagued Japan in the past years.

As a result of the first quarter data ending March 31, Japan's economic growth was in the positive column for the first time in two years for their fiscal year (which ended March 31). The economy grew by 0.5 percent in fiscal year 1999, just shy of the government's target of 0.6 percent.

Japan has used a number of fiscal policy measures to increase economic growth. The government has underwritten housing development, provided small business loans, initiated public works projects, spending trillions of yen trying to stimulate the economy. There is some evidence that these pump-priming measures have worked. Consumer spending rose 1.8 percent in the first quarter compared to a similar decline in the previous quarter. Construction orders are up by 20 percent, an indication that companies are contemplating expansions.

Whether Japan's economy has been pushed to the point of self-sustaining growth is the question that policy makers must address. Japan's debts have climbed to 130 percent of GDP as a result of its fiscal policies. But many are afraid to reduce stimulus measures because it would throw Japan back into recession.

(Updated July 1, 2000)

1. Using aggregate demand/aggregate supply diagrams illustrate the Japanese economy with a recessionary gap. Carefully indicate the price level and level of real GDP.
2. Suppose the government decided to implement an expansionary fiscal policy. What are some policies it might implement? How would these policies impact the economy?
3. Illustrate the impact of these policies on the diagram above. What happens to the gap? GDP? The price level?
4. What happens to the gap if the expansionary policies are eliminated?
Source Stephanie Strom, "Japanese Economy Rose 2.4% in Quarter," The New York Times, June 10, 2000.

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