The Japanese economy has suffered a period of low nominal growth and deflation for the two previous decades. The Japanese Prime Minister Shinzo Abe is attempting to bring Japan's economic growth back to desirable levels through pressuring the Bank of Japan (Japan's central bank) to raise its inflation target to 2% more than the 1% it was set at (partly due to the Japanese preference on saving). In addition, Mr. Abe's administration would seek to use a fiscal package to help stimulate the economy.
The question is whether or not using monetary policy from the Bank of Japan alone will be enough to suffice in growing the Japanese economy or will Mr. Abe's fiscal stimulus package be essential in reviving the Japanese economy. In this scenario, it may be better for a combination of monetary and fiscal stimulus to take place as monetary policy alone may not be enough for to encourage spending and create inflation. The current US economy is an example of how monetary policy is ineffective as despite interest rates are extremely low (near zero), low consumer confidence discourages consumers to borrow. The fiscal stimulus result in large amounts of money ejected into the economy in the form of large spending that will increase the nominal GDP. The major risk in involving a large stimulus package from the government would be its huge public debt.
source: http://www.economist.com/blogs/freeexchange/2013/01/japanese-economy
3 comments:
I agree with Anuk. I think monetary stimulus alone will not be sufficient to catalyze expansion of the Japanese economy as I do not believe the growth in the money supply will be used and will simply sit in banks as excess reserves. The monetary policy alone will not be effective because banks will be scared to lend as well as consumers will be scared to borrow due to a variety of issues like the low consumer confidence Japan and the globe is currently experiencing as well fears about the eurozone and uncertainty about China's growth prospects.
I also think that monetary policy should not be the only tool used to help Japan's economy. If the goal is to increase inflation then a substantial fiscal stimulus package could help. As the article notes, Japan has a large amount of public debt, and increased debt from a stimulus package might push Japanese administrators to favor inflation to help inflate the debt away.
I agree with Andrew that a bigger focus on fiscal policy would work better. In my view, fiscal policy works better than monetary policy in times of crisis.
The key factor of consideration should be the falling consumer confidence. Unless consumer confidence is not increased, monetary expansion would not work as planned.
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