Conflicting policy advice for Japan’s prime minister
Letter to the Editor

Article Highlights

  • Japan has little choice but to engage in large-scale, medium-term fiscal consolidation

    Tweet This

  • Structural reform, while necessary, will not be enough

    Tweet This

  • The Bank of Japan must be prepared to expand its campaign of quantitative easing even further

    Tweet This

Sir,

Your editorial on the challenges facing Abenomics (August 14) seems to offer the Japanese prime minister contradictory policy advice. On the one hand, despite the fact that, at around 36 per cent, Japanese corporate tax rates are among the highest in the OECD, you suggest that more of the fiscal burden should be placed on the country’s cash-rich companies to lighten the tax load on families.

On the other, you suggest that Shinzo Abe should make every effort to persuade businesses to inject new cash into the economy. The sad reality is that the highly compromised state of Japan’s public finances, as reflected in a gross public debt to gross domestic product ratio of 240 per cent and a primary budget deficit of over 6 per cent of GDP, leaves the country with little option but to engage in large-scale, medium-term fiscal consolidation.

This is all the more so the case considering that the country’s very poor demographics will continue to undermine its long-run savings performance. According to IMF calculations, beyond 2015 Japan will need further fiscal measures totalling around 6.5 per cent of GDP over and above the second planned VAT increase to place the public debt to GDP ratio on a declining path.

The main policy lesson from Japan’s second quarter tax-induced economic slump would seem to be that not only must Mr Abe strengthen the third arrow of his strategy by engaging in more serious structural economic reform as your editorial correctly suggests. Rather, it would seem that the Bank of Japan must be prepared to engage in an even more activist policy of quantitative easing than it has been doing to date. It should do so in order to facilitate a further significant weakening of the currency that might allow the country to rebalance its public finances without risking another deflationary economic recession.

Desmond Lachman, American Enterprise Institute, Washington, DC, US 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Holder will regret his refusal to obey the Constitution
image 'Flood Wall Street' climate protesters take aim at their corporate allies
image 3 opportunities for better US-India defense ties
image Is Nicolás Maduro Latin America's new man at the United Nations?
AEI on Facebook
Events Calendar
  • 29
    MON
  • 30
    TUE
  • 01
    WED
  • 02
    THU
  • 03
    FRI
Thursday, October 02, 2014 | 9:00 a.m. – 10:30 a.m.
Campbell Brown talks teacher tenure

We welcome you to join us as Brown shares her perspective on the role of the courts in seeking educational justice and advocating for continued reform.

Friday, October 03, 2014 | 12:00 p.m. – 1:00 p.m.
Harnessing the power of markets to tackle global poverty: A conversation with Jacqueline Novogratz

AEI welcomes you to this Philanthropic Freedom Project event, in which Novogratz will describe her work investing in early-stage enterprises, what she has learned at the helm of Acumen, and the role entrepreneurship can play in the fight against global poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.