Evaluation of Japan’s Macro-Fiscal Policy and its Challenges

Shin-ichi Fukuda and Naoto Soma
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Shin-ichi Fukuda: Professor, Graduate School of Economics, University of Tokyo
Naoto Soma: Associate Professor, Faculty of International Social Sciences, Division of International Social Sciences, Yokohama National University

Public Policy Review, 2021, vol. 17, issue 2, 1-28

Abstract: This study aims to examine the effectiveness of macro-fiscal policy conceptually to derive empirical implications for the Japanese economy. Since the mid-1990s, Japan has remained stuck in a liquidity trap, where interest rates fall to or are below zero. However, not only has the cumulative fiscal deficit increased to an unprecedented level, but many structural problems have also emerged. Under these circumstances, previous empirical findings are inconclusive regarding whether fiscal policy has worked effectively in the Japanese economy. This study reexamined the findings of previous studies based on data for the period since 1980 and considered the challenges for such analyses. When a reduced-form equation or a VAR model was estimated, we found that the effects of fiscal expenditure, which had declined over the medium- to long-term period, may have increased since the fourth quarter of 2010. This finding suggests that the steadily falling effects of the fiscal expenditure may have recovered under ultra-low interest rates. Using the ESP Forecast Survey, representing the forecast data prepared by private-sector economists, it was confirmed that these economists assumed the presence of a significant correlation between fiscal expenditure and GDP under ultra-low interest rates. However, the results must be carefully interpreted with respect to the limitations of the estimation method, including outliers, the reference year for GDP used in the analysis, and the robustness of the sample period. As the conclusion of this paper is based on a short sample period whose estimation efficiency is not necessarily high, it is unclear whether the effects of fiscal expenditure will continue to improve. In addition, the results obtained through a reduced-form equation or a VAR model indicate the presence of a Granger causality but not the presence of a true causal relationship. In the field of macroeconomics, the effectiveness of fiscal policy has been discussed for many years. This study’s findings should be verified in the future to check its robustness.

Keywords: fiscal policy; structural changes; ultra-low interest rates; ESP Forecast (search for similar items in EconPapers)
JEL-codes: E3 E62 H30 (search for similar items in EconPapers)
Date: 2021
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