Exploring the Causes and Remedies of Japanization
Edited by Dongchul Cho, Takatoshi Ito and Andrew Mason
Chapter 12: Avoiding another “lost decade”: what role for fiscal policy?
Recent global economic stagnation has stimulated debate about the role of fiscal policy in supporting growth, notably through infrastructure spending. Japan’s experience during its “Lost Decades” provides insights on maximizing the impact of fiscal policy during downturns. First, while Japan provided early and effective fiscal stimulus, later fiscal policy was conducted in a “stop-and-go” and often pro-cyclical manner. Second, a shift in spending away from infrastructure toward transfers reduced the overall fiscal multiplier. Third, a decline in the efficiency of public investment—partly reflecting weaknesses in fiscal institutions—also reduced the impact of fiscal policy. Fourth, the concurrent dramatic shift in demographics reduced potential growth and limited fiscal space, so that fiscal policy was fighting against a strong tide. Avoiding similar problems can help countries design effective fiscal policy responses in the current economic environment.
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