Special Issue: The Subjects and designs of public policies in the 21st century
The causes of Japan’s long-term “Heisei Recession” and misconceptions in public opinion
2001 Volume 1 Pages 24-38
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2001 Volume 1 Pages 24-38
The Japanese economy has been deteriorating for more than ten years. Real GDP growth through the 1990’s was nearly 1%, much lower than the 5% growth during the late 1980’s. The major reason why weak economic conditions continued for such a long time was the particular macroeconomic policy taken by the Japanese government.
During this period, the Japanese government pursued a “stop-and-go” expansionary economic policy four times. Many people were under the mistaken impression that fiscal stimulation could not substitute for building an economic recovery. They interpreted macroeconomic policy as resulting only in rapid expansion of government debt and vast amounts of meaningless public works.
If we trace the course of the Japanese economy during this period more precisely, however, we can easily find that this argument is completely mistaken. In all cases, when the government introduced a fiscal stimulus policy, we can see clear effects on economic activities. Stock prices rose sharply in every case. And real economic activities showed a clear upswing reacting to each expansionary economic policy.
The true reason for deterioration of the economy in each case was that the government switched too quickly to tight fiscal and monetary policy.
In 1994, the Bank of Japan tried to raise short-term interest rates too early. In 1996, the Hashimoto administration decided to raise taxes sharply, derailing economic recovery. In 2000, the Mori administration shifted to tight fiscal policy, and the Bank of Japan raised the short-term interest rate. Stock prices fell dramatically and the Japanese economy moved into recession again from the autumn of 2000.
The real reason for long-term deterioration of Japan’s economy is this “stop and go” economic policy. Moreover, the debate about this failure among academic economists is underdeveloped, and the mass media has lost much of its spirit as an independent critic. In order to rebuild the Japanese economy, it is also necessary to improve the quality and scope of discussion in Japan
