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NO. 16 — April 24, 1998

 

Feature Article

JAPANESE FISCAL POLICY: ONE FOOT ON THE GAS, THE OTHER TIED TO THE BRAKE by Jon Choy

  • Summary
  • Growing Debts, Slowing Economy
  • Fiscal Structural Reform Act
  • Budgets For A New Era
  • Not Business As Usual
  • Adding An Emergency Escape Clause
  • Seeking Fiscal Flexibility
  • Appendix
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Summary

The central issue in Japanese fiscal policy debates during this decade has been how to restore economic growth in the short term without endangering the government's long-term financial situation. Political leaders and Ministry of Finance bureaucrats have opted for targeted, short-term tax cuts and spending hikes to prime the pump, combined with a better balance between overall spending and revenues.

Prime Minister Ryutaro Hashimoto, in particular, has presented himself to voters as a leader willing to make hard — but necessary — decisions, last year implementing a previously decided 2 percentage point hike in the consumption tax and ending a special cut in personal income taxes, for example. He also claims credit for a deficit-reduction law that sets clear goals for stanching the red ink and specifies the means to that end.

But Mr. Hashimoto's timing was poor. Just when analysts expected consumer spending, the economy's driving force, to recover from these twin blows, the Asian currency crisis flared and several top domestic financial institutions failed. That sequence further undermined consumers' already shaky confidence and added to the business community's pessimism.

Under intense domestic and foreign pressure to rejuvenate the economy, Mr. Hashimoto is facing an acid test of his character and leadership. Can he reverse the tight fiscal policy he sanctioned and introduce some flexibility into the fiscal reconstruction law and still remain in power?

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Weekly Review

JAPAN'S ECONOMIC PROBLEMS TOP G-7 AGENDA by Douglas Ostrom

Japan has gotten the attention of its fellow members of the Group of Seven industrial nations but not necessarily the help or the understanding that it wanted. After assembling in Washington April 15, finance ministers and central bankers from the United States, Canada, France, Germany, Great Britain, Italy and Japan said in a postmeeting communique that the "challenges facing Japan are serious and have intensified in recent months." Moreover, in a rare reference to a specific currency, they called the yen's recent drop in value "excessive." Secretary of the Treasury Robert Rubin, who chaired the meeting, said afterward that "the focus was predominately on Japan," adding that "[t]he critical time now has come for Japan."

 

BANKRUPTCIES SOAR IN LOW-FLYING JAPANESE ECONOMY by Arthur J. Alexander

Bankruptcies in Japan have been increasing in the past 18 months and now are reaching levels not seen since the peak years of the mid-1980s. Even more important, the liabilities of bankrupt companies are at historic highs, even after correcting for inflation.

 

DIET CONSIDERS FREEDOM OF INFORMATION ACT by Jon Choy

Buoyed by the recent string of scandals and embarrassing incidents involving the bureaucracy, Japanese proponents of a more open and accountable government are nearing a major milestone in their long-running campaign. The cabinet of Prime Minister Ryutaro Hashimoto sent legislation to the Diet March 27 that would require every ministry and agency to respond to information requests from any source. Observers predict that the bill will be voted into law by the mid-June end of the current regular legislative session. But, since the proposed law forcing the government to divulge information was drafted by the bureaucracy itself, open-government advocates say that the bill has significant defects. Nevertheless, everyone agrees that the pending legislation will pull back the government's veil of secrecy at least partway.

 

HASHIMOTO, YELTSIN COAST THROUGH SECOND 'NO-NECKTIE' SUMMIT by Barbara Wanner

Prime Minister Ryutaro Hashimoto and Russian President Boris Yeltsin wrapped up their second informal meeting in five months with promises to improve bilateral economic, security and cultural ties, explore collaboration in space technology, exchange state visits and undertake a groundbreaking greenhouse gas emissions swap. As expected, the two leaders did not resolve the dispute concerning joint claims to four Kuril islands northeast of Hokkaido that the former Soviet Union seized at the close of World War II. This disagreement has blocked conclusion of a peace treaty between the two nations for more than 50 years. However, Mr. Hashimoto, who hosted the April 18-19 talks in the seaside town of Kawana in Shizuoka prefecture, reportedly proposed what unnamed Japanese officials termed a "psychologically more acceptable" approach to resolving the territorial conflict.

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