Deflation and Fiscal Deficits

Three Questions About Japanese Economic Policy

verfasst von: Yoshikiyo Sakai

Verlag: Springer Nature Singapore

Buchreihe : SpringerBriefs in Economics

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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In this study on the Japanese economy, the author focuses on three problems related to economic policy and presents their answers. The author analyzes (i) what mechanisms exist for fiscal policy and the price level, (ii) whether the MMT proposition that public deficits increase people’s wealth and savings fits into the standard macro model, and (iii) whether Blanchard's assertion that fiscal deficits are net wealth in the US economy can be applied to Japanese economy as well. The propositions of Sims’ FTPL, Kelton's MMT, Japan's Ricardian type argument, and the non-Ricardian type of government by Blanchard have been understood as independent economic perceptions, but they will be theoretically shown as a coherent story. Namely, this study presents a macroeconomic framework that includes the financial sector and derives Sims’ proposition that “fiscal policy can be the sole determinant of the price level.” It also shows that MMT's claim that "budget deficits increase our wealth and collective savings" can inevitably hold within this framework. Furthermore, it presents a model that consistently explains that public debt leads to financial collapse but contributes to economic welfare.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Circumstances of Questions and Theoretical Background

Abstract

In this study, we will focus on three problems related to the recent economic policy of Japan and present their answers. We will describe and analyze (i) what mechanism exists for fiscal and monetary policy and the price level, (ii) whether the modern monetary theory (MMT)proposition that public debt increases people’s wealth and savings fits into the standard macro model, and (iii) whether Blanchard’s assertion that budget deficits are net wealth in the US economy can be applied to Japan economy as well. The propositions of Sims’ the fiscal theory of the price level (FTPL), Kelton’s MMT, Japan’s Ricardian type argument the so-called Crocodile Mouth theory, and Blanchard’s non-Ricardian type of government have been understood as independent economic perceptions, but they will be shown as a theoretically coherent story.

Yoshikiyo Sakai

Chapter 2. Timeline of Economic Policies in Japan

Abstract

Chapter 2 provides an overview of the circumstances of measures by the Bank of Japan against deflation. Triggered by the bursting of the asset bubble that peaked in 1990, Japan’s deflation occurred in 1997 and 1998. The Bank of Japan was forced to take unprecedented deflationary measures. The zero-interest rate policy and the quantitative easing (QE) policy were called unconventional monetary policy. The japanese economy, which seemed to have recovered through deflationary measures accompanied with time-duration effect, fell back into deflation due to the global financial crisis in September 2008. Quantitative and qualitative easing monetary policy (QQE) in April 2013 was a measure to achieve the 2 percent inflation target by judging that deflation is a monetary phenomenon. The 2 percent CPI estimate, however, started to falter since the consumption tax hike from 5 to 8 percent in April 2014. QQE with a negative Interest Rate in January 2016 and QQE with Yield Curve Control in September 2016 were announced, but these measures did not achieve the inflation target. On the other hand, the consumption tax rate was raised again from 8 to 10 percent in October 2019.

Yoshikiyo Sakai

Chapter 3. Structure of Quantitative and Qualitative Monetary Easing and Joint Statement with Government

Abstract

A series of quantitative and qualitative monetary easing consists of interest rate control and inflation expectations. In the former, the Bank of Japan has gained the knowledge that the yield curve can be controlled by operations. As to the latter, it is recognized that inflation expectations must work for the quantitative and qualitative monetary easing (QQE) mechanism to be established. On the other hand, the government has set a goal of restoring fiscal soundness. Then, what is the relationship between monetary policy and fiscal policy? The economic policy of Japan has been governed by the Joint Statement of the Government and the Bank of Japan released in January 2013. Under this framework the Bank of Japan is responsible for achieving price stability of 2 percent, and the Government is responsible for sustainable economic growth with the aim of restoring fiscal consolidation. The characteristic of this statement is that each of them is independently responsible for the realization of the matters under their jurisdiction.

Yoshikiyo Sakai

Chapter 4. Fiscal Theory of Price Level and Modern Monetary Theory

Abstract

Since around 2016, when it became difficult to achieve the price stability target of 2 percent through monetary policy alone, the fiscal theory of the price level (FTPL) and the modern monetary theory (MMT) have been attracting attention from the perspective of fiscal policy. Sims (2013) argues that fiscal and monetary policy consist of a single mechanism, and that fiscal policy is the sole determinant of price level. This is clearly different from the policy alliance between the Governments and the Bank of Japan. On the other hand, Kelton in her book “The Deficit Myth Modern Monetary Theory and the Birth of the People’s Economy” (2020) derives the assertion that “public debt is the wealth of the state.” It is contrary to the assertion that “the public debt is too big and will collapse sooner or later.”

Yoshikiyo Sakai

Chapter 5. Answers to Questions 1 and 2: Financial System from Viewpoint of Payment

Abstract

We give answers to questions 1 and 2, which are based on the discussions of the fiscal theory of the price level (FTPL) and the modern monetary theory (MMT). Specifically, from the perspective of economics of payments by Freeman (1996), we present a model consistent with the FTPL assertion that fiscal and monetary policy are intertwined. This mechanism explains the process by which the central bank underwrites government bonds, which are the source of fiscal spending, thereby increasing the money stock and consequently affecting prices. In addition, the MMT proposition “budget deficits are national wealth” is established between the public sector and the private sector from the assumptions, (i) the government activity in which revenue is financed after spending decision is made and (ii) government bonds and the monetary base are treated identically.

Yoshikiyo Sakai

Chapter 6. Answer to Question 3: Crocodile Mouth Theory versus Blanchard Claim

Abstract

We theoretically analyze how public debt affects the economy. There are two opposing ideas: the heavy public debt leads to fiscal collapse, or it contributes to economic efficiency. First, we derive the condition under which the current public debt can be redeemed by refinancing government bonds. This means that there is the limit to government bonds issued, and if they exceed the maximum, it will not be possible for the government to repay the current public debt. Therefore, the assertion that “accumulated public debt must be reduced as soon as possible” is applicable. On the other hand, in the same model, we show that if the current public debt can be repaid, namely refinancing succeeds, the economy with the larger public debt is more efficient according to Pareto criterion. This corresponds to Blanchard’s assertion that public debt contributes to economic welfare, not costs. Thus, these two conflicting claims can be explained coherently by clarifying whether the current public debt satisfies the redeemable condition.

Yoshikiyo Sakai

Chapter 7. Conclusion

Abstract

This paper has presented three questions about the Japanese economic policy and provided answers from the perspective of standard macro theory. The impact of fiscal policy on prices (Question 1) and the macro analysis of MMT (Question 2) are conducted by the mechanism by which government bonds are settled on the monetary base. On the other hand, in the answer to Question 3, public debt is analyzed on the assumption that government bonds and the monetary base are the same. However, government bonds are IOUs that do not have finality while the monetary base issued by the central bank have finality. Therefore, from the viewpoint of the economics of payments, the analysis of public debt by distinguishing between government bonds and the monetary base will be an issue for the future.

Yoshikiyo Sakai

Titel: Deflation and Fiscal Deficits
verfasst von: Yoshikiyo Sakai
Verlag: Springer Nature Singapore
Electronic ISBN: 978-981-9704-15-6
Print ISBN: 978-981-9704-14-9
DOI: https://doi.org/10.1007/978-981-97-0415-6