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Home > Debates Last Updated: 14:31 03/09/2007
Debate: Comment

Comments on the Shishido-Hama debate

Abhishek Jain (University of Southern California, USA)

Economic upturns and downturns are a normal part of the business cycle in any market economy. Japan's current economic situation seems to be in a "deflationary spiral" with falling prices, a downward stock market and the GDP gap widening. This is very similar to the situation in the 1930s for the U.S. (otherwise known as the Great Depression).

I agree with Shishido's "big push" strategy to pull Japan out of the "deflationary spiral." I believe that Keynesian economics (demand-side economics), which helped U.S. out of the Great Depression will help boost Japanese economy out of an economic downturn. An active government involvement is necessary to combat a sluggish business economy. We know that from Keynesian economics that GNP equals the total market value of consumption, investment, government expenditure, and net exports. Therefore, market forces alone are not enough to increase aggregate demand during Japan's economic slump.

Some would argue that many economists have proposed this type of "big push" strategy for the past ten years but Shishido's scenario is a bit different. The emphasis on private sectors including investment in housing and information technology related businesses is critical to a smooth economic recovery for Japan. The emphasis on these two fields will rebuild the nation's economic infrastructure and at the same time fight the economic downturn.

An expansionary fiscal policy of decreasing taxes and increasing government spending will stimulate business activity and increase aggregate demand. This also leads to an increase in disposable income while taxes decrease. Still, many constraints remain on expansionary fiscal policy for Japan.

  1. Will Prime Minister Koizumi increase the debt limit of the nation, to allow for an expansionary fiscal policy?
  2. Will an increase in people's ability to buy goods (increasing disposable incomes) cause people to actually spend their new incomes?
  3. Will people accept a larger role for the government in the economy, while they are concerned about massive budgetary deficits in the future?

Besides fiscal policy, a better monetary policy will increase business activity. The BOJ and the MOF in coordinating monetary policy with other government actions should follow an easy-money policy. An easy-money policy will expand the money supply, increase aggregate demand and promote economic growth.

I would also like to point out that Hama's argument is incorrect. Hama argues that the "big push" may increase growth for the short-term, however, the old ways of doing things [in Japan] remain intact, and the result of the "big push" will further worsen Japan's economic problems. The problem with this argument is that a high investment economy will slowly remove the old infrastructure of Japan. This is because businesses will see a better economic future for Japan and therefore businesses and government officials will have more of an incentive to ameliorate the current infrastructure of Japan. If people see a better future, they are more likely to work and change the current infrastructure, but if they see a grim future, they will most likely not bother in improving old ways of doing things.

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