Seoul Journal of Economics - Vol. 17 , No. 1

[ Article ]
Seoul Journal of Economics - Vol. 17, No. 1, pp. 1-23
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 29 Feb 2004
Received 02 Feb 2004 Revised 15 Mar 2004

Japan’s Fiscal Policy: Sustainability of Government Deficits
Toshihiro Ihori
Professor, Department of Economics, University of Tokyo, Hongo, Tokyo 113-0033, Japan, Tel: +81-3-5841-5502, Fax: +81-3-5841-5521 (ihori@e.u-tokyo.ac.jp)

JEL Classification: H61, H62, H63


The purpose of this paper is to analysis the Japanese fiscal policy particularly from the viewpoint of the sustainability problem of government bond policy and the fiscal reconstruction movement in Japan. This paper first summarizes Japan's fiscal policies in the 1990s. Then, we investigate the macroeconomic impact of government debt and fiscal difficulties of heavy dependency of debt finance in the public sector. We find that fiscal sustainability may become a serious issue. We also explore political constraints to the fiscal reconstruction movements. In order to realize successful fiscal reconstruction, the central government needs to restrain lobbying activities of local political groups.

Keywords: Japan's fiscal policy, Sustainability, Deficits


An earlier version of the paper was presented at the Conference on February 2, 2004, Seoul, Korea. I would like to thank Joon Koo Lee and other participants for their useful comments.

1. Alesina, A., and Perotti, R. “Fiscal Expansions and Adjustments in OECD Countries.” Economic Policy 21 (1995): 207-48.
2. Alesina, A., and Perotti, R. “Fiscal Adjustments in OECD Countries: Composition and Macroeconomic Effects.” National Bureau of Economic Research Working Paper No. 5730, 1996.
3. Alesina, A., and Tabellini, G. “A Positive Theory of Fiscal Deficits and Government Debt.” Review of Economic Studies 57 (No. 3 1990): 403-14.
4. Asako, K., Ito, T., and Sakamoto, K. “The Rise and Fall of the Deficit in Japan.” Journal of the Japanese and International Economies 5 (No. 4 1991): 451-72.
5. Asako, K., Tsuneki, A., Fukuda, S., Teruyama, H., Tsukamoto, T., and Sugiyama, M. “Productivity Effect of Public Capital and Welfare Evaluation of Public Investment Policy.” Keizai Bunseki No. 135, Economic Planning Agency, 1994 (in Japanese).
6. Barro, R. J. “U.S. Deficits Since World War I.” Scandinavian Journal of Economics 88 (No. 1 1986): 195-222.
7. Beveridge, S., and Nelson, C. R. “A New Approach to Decomposition of Economic Time Series into Permanent and Transitory Components with Particular Attention to Measurement of the ‘Business Cycle.'” Journal of Monetary Economics 7 (No. 2 1981): 151-74.
8. Bohn, H. “The Behavior of U.S. Public Debt and Deficits.” Quarterly Journal of Economics 113 (No. 3 1998): 949-63.
9. Doi, T. “Panel Analysis of Public Capital in Japan.” Kokumin Keizai 161 (1998): 29-45 (in Japanese).
10. Doi, T., and Ashiya, M. “Distribution of Interregional Grant and Government Party: National Government Disbursement and LDP.” Japan Center for Economic Research Economic Journal 34 (1997): 180-95 (in Japanese).
11. Doi, T., and Ihori, T. “Fiscal Reconstruction and Local Interest Groups in Japan.” Journal of the Japanese and International Economies 16 (No. 4 2002): 492-511.
12. Doi, T., and Ihori, T. “Sustainability of Government Deficits in Japan: Including Trends in Local Government Finance.” Discussion Paper, NIRA, 2003.
13. Hamilton, J., and Flavin, M. “On the Limitations of Government Borrowing: A Framework for Empirical Testing.” American Economic Review 76 (No. 4 1986): 808-16.
14. Ihori, T., and Doi, T. Readings in Public Finance (Zaisei Tohon) 6th ed., Toyo Keizai Inc., 2001 (in Japanese).
15. Ihori, T., and Kondo, H. “Efficiency of Disaggregate Public Capital Provision in Japan.” Public Finance and Management 1 (No. 2 2001): 161-82.
16. Ihori, T., Doi, T., and Kondo, H. “Japanese Fiscal Reform: Fiscal Reconstruction and Fiscal Policy.” Japan and the World Economy 13 (No. 4 2001): 351-70.
17. Ihori, T., Nakazato, T., and Kawade, M. “Japan's Fiscal Policies in the 1990s.” The World Economy 26 (No. 3 2003): 325-38.
18. Iwamoto, Y. “On the Evaluation of Japan's Public Investment Policy.” Economic Review 41 (1990): 250-61 (in Japanese).
19. Mitsui, K., and Ohta, K. Productivity of Public Capital and Public Finance. Nihon Hyoron Sha, 1995 (in Japanese).
20. OECD. Economic Outlook Vol. 66. 1999.
21. Persson, T., and Svensson, L. E. O. “Why Stubborn Conservative Would Run a Deficit: Policy with Time-Inconsistent Preferences.” Quarterly Journal of Economics 104 (No. 2 1989): 325-45.
22. Shibata, T. (ed.) Japan's Public Sector: How the Government Is Financed. University of Tokyo Press, 1993.
23. Yoshino, N., and Nakajima, T. (eds.) The Economic Effect of Public Investment. Nihon Hyoron Sha, 1999 (in Japanese).