Japan’s 2-Decade Experiment with Fiscal Austerity (or Stimulus) and -0.3% Annual NGDP Growth

UPDATE:  Thanks to Scott Sumner who alerted me in his comment below that I had not properly checked the data for Japanese GDP on the St. Louis Fed website.  There was one series covering real GDP annually from 1960 to 2010 and another quarterly series from 1994 to 2011, which is what I used.  The second series was listed as GDP, so I assumed that it meant nominal GDP.  But when I checked after reading Scott’s comment, I found that indeed it was real GDP as well.  Then using a separate series for the GDP deflator I calculated nominal GDP.  I make corrections in the post below and have modified the title of the post accordingly.

Peter Tasker has an excellent op-ed (“Europe can learn from Japan’s austerity endgame”) in Monday’s Financial Times, pointing out that Japan for the last two decades has been pursuing the kind of fiscal austerity program now being urged on Europe to combat their debt crisis.

When Japan’s bubble economy imploded in the early 1990s, public finances were in surplus and government debt was a mere 20 percent of gross domestic product. Twenty years on, the government is running a yawning deficit and gross public debt as swollen to a sumo-sized 200 percent of GDP.

Fiscal austerity did not begin immediately, but “Japan’s experiment with Keynesian-style public works programmes” ended in 1997. The public works programs did not promote a significant recovery, but in the six years from 1992 to 1997, real GDP at least managed to grow at a feeble 1.3% annual rate. But in the two years after austerity began — public works spending being cut back and the consumption tax raised, real GDP fell by 2.1% (1998) and 0.1% (1999). Despite fiscal austerity after 1997, the budgetary situation steadily deteriorated, government outlays rising as percentage of GDP while tax revenues are 5% lower as a percentage of GDP than in 1988 when the consumption tax was introduced.

Tasker also asserts observes that Japan’s nominal GDP is now lower than it was in 1992. The data on the St. Louis Fed website do not seem to bear out that claim. According to the St. Louis Fed data, nominal real GDP in the third quarter of 2011 was 13.1% higher than in the first quarter of 1994, which is the starting point for the St. Louis Fed data series of Japanese nominal GDP.  Nominal GDP over the same period fell by 5.2%.  Thus, over the 17.5 years for which the St. Louis Fed reports Japanese NGDP, the average annual rate of growth of NGDP has been 0.74 -0.3%. That is the future the Eurozone countries are looking at unless the European Central Bank is willing to take aggressive steps to ensure that nominal GDP growth is at least 5% a year for the foreseeable future. An increase in Japanese NGDP growth wouldn’t be such a bad idea either.  As I have observed before (also here and here), the European debt crisis is really an NGDP crisis.


19 Responses to “Japan’s 2-Decade Experiment with Fiscal Austerity (or Stimulus) and -0.3% Annual NGDP Growth”

  1. 1 Max February 13, 2012 at 11:30 pm

    The Euro zone really needs fiscal policy, since monetary policy can’t be correct for all countries. That’s why currency unions don’t work.

    Japan just needs some inflation. Even if nobody wants to spend, they can still inflate via exports.


  2. 2 foosion February 14, 2012 at 3:31 am

    I frequently see the claim by austerity fans that deficits are in and of themselves stimulative. Therefore, goes this claim, as Japan has had large deficits, it is not experimenting with austerity, rather it is providing evidence that stimulus doesn’t work.


  3. 3 Luis H Arroyo February 14, 2012 at 9:14 am

    the European debt crisis is really an NGDP crisis.
    Obviously theatre is true. But i’m affraid that any monetary policy of ECB Williams never be optimal. EZ is not an OCA. The relative prices between members Will always be a problem.


  4. 4 David Glasner February 14, 2012 at 9:51 am

    Max, I have nothing against fiscal policy, but I am dubious about how effective it can be under non-extreme situations. You are identifying a basic problem with currency unions between countries with very different economic fundamentals and limited labor mobility. In such situations, especially in a crisis, it is better to err on the side of monetary ease.

    Foosion, There used to be a concept called the full employment surplus. The idea was to estimate what the budget deficit would be under current spending and taxing rules if the economy were operating at full employment. So even if you were running a deficit because of low current output and employment, if you would have accumulated a surplus at full employment, the fiscal stance would be considered restrictive or austere. For some reason, it doesn’t seem that they are looking at fiscal policy any more. But maybe I’m just not following closely enough.

    Luis, As I said in reply to Max, that is a real problem with a broad currency union. But under current conditions, the policy should err on the side of monetary ease. Instead it is erring on the side of tightness, but perhaps it is changing.


  5. 5 Scott Sumner February 14, 2012 at 9:52 am

    David; Good post, but a few suggestions:

    1. NGDP is actually lower than in 1994, the St. Louis Fred data must be wrong. Are you sure it’s not RGDP?

    2. In the title, the term “austerity” should be replaced by “stimulus.”

    3. Japan shows that huge deficits don’t increase NGDP if the central bank is running deflationary monetary policy (something for the MMTers to think about.)

    4. If the BOJ set a 3% NGDP growth target, they wouldn’t need fiscal stimulus.


  6. 6 foosion February 14, 2012 at 10:13 am

    Would Japan be running much of a deficit at full employment?


    Do you accept full employment surplus as a better measure of stimulus than just looking at fiscal surplus/deficit?


  7. 7 David Glasner February 14, 2012 at 10:28 am

    Scott, Thanks. You were right, as usual. It was real GDP. I am recalculating and will post an update when I have the revised numbers.


  8. 8 Benjamin Cole February 14, 2012 at 11:12 am

    I say everything Sumner says.

    If you go here, you will Japan’s GDP (nominal) is smaller in 2010 than in 1995. http://en.wikipedia.org/wiki/Economy_of_Japan

    And it has been shrinking more, even as the yen wildly appreciates.

    Japan proves the epic failure of deflationary tight-money policies. They just don’t work. Anyone suggesting tight-money policies is an active menace to American prosperity.

    Of all the economists in the world, why is it only Sumner consistently approaches national economies? In this regard, Sumner is like Milton Friedman. You always know what Friedman was going to say, as he had a consistent logic in his approach. That is a strength.

    To muddle fiscal outlays and monetary policies reveals muddled thinking.


  9. 9 Philo February 14, 2012 at 12:08 pm

    “Despite fiscal austerity after 1997, the budgetary situation steadily deteriorated . . . .” I presume, then, that you are calling it “austerity” only relative to the previous few years; *absolute* austerity surely should include a budget that is at least balanced, if not in surplus.

    If you are suggesting that it is bad for NGDP to fall at an annual rate of 0.3% for a long time, you might explain why. Who cares about NGDP, so long as it is developing at a steady rate, so as to minimize monetary disequilibrium? *Real* GDP comes closer to being something we should care about, and so the Japanese economic performance (around 0.7% growth per annum), while it could be better, is not horribly bad, especially in view of the national demographics.


  10. 10 Luis H Arroyo February 14, 2012 at 12:41 pm

    “the European debt crisis is really an NGDP crisis.”
    Sure that is right. but I´m also sure that it is not only a monetary problem; there is an asimetry price adjustment problem also. That is, a long run problem.


  11. 12 David Glasner February 14, 2012 at 2:19 pm

    foosion, I doubt it, but I am just surmising.

    Benjamin, It’s usually safe to agree with Scott. I used to agree with him about 97% of the time. Lately, we have been having more disagreements, so I am probably down to about 94 or 95% of the time.

    Philo, Fair point. I think there is a potential problem when the expected yield from holding money begins to approach the expected yield on holding real capital. When NGDP is falling or even flat, I think the expected yield from holding money starts to come too close the expected yield on real capital. As an empirical matter we see that economies with very low or negative NGDP growth tend to underperform economies with NGDP growth that is somewhat higher. The optimal growth rate of NGDP is unclear to me.

    Luis, For sure. There is a lot to fix in Europe, but increasing the rate of NGDP growth seems to me to be a prerequisite for fixing the other problems.


  12. 13 Luis H Arroyo February 14, 2012 at 2:31 pm

    Sorry David, I did really think the first comment had not entered. I send it from a Ipad not of my propiety.
    Sure, I agree, The most inmediate need is to rise NGDP. But that will mean more inflation for Germany, and they will not tolerate it.


  13. 14 Robert waldmann February 14, 2012 at 6:02 pm

    The title says fiscal, but thencategory is monetary policy and you direct your advice at the ECB not the Bundestag the House of commons and other fiscal auhorities who can borrow at low rates?


  14. 15 Scott Sumner February 14, 2012 at 7:53 pm

    Foosion, I doubt either measure is any good. Japanese unemployment is around 4% to 5%, which is where it has been for decades. I have no idea what the phrase “full employment” means in Japan. Does that mean the “natural rate”? If Japanese unemployment has been at this level for 20 years, how would we determine the current natural rate?


  15. 16 David Glasner February 16, 2012 at 6:08 pm

    Luis, Well, we do seem to have a problem, don’t we?

    Robert, You are a careful reader, aren’t you? The point is that an overly tight monetary policy can prevent fiscal policy from having any effect either to stimulate the econ or to reduce the budget deficit or the debt burden.

    Scott, But if you think that Japan is operating at full employment, how can you also argue that Japan’s monetary policy is responsible for the minimal growth in real GDP over the past two decades? What am I missing?


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

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