Fiscal and Monetary Policies to Promote Restoration of the Japanese Economy
To Correct the Strong Yen and Get Out of Deflation
By Takemoto Naokazu
Member of the House of Representatives
January 28, 2013
Introduction
Since the burst of the bubble economy, Japan has been suffering from deflation for such a long time that we call it the “two lost decades”. Due to this period of continuing deflation, we have had a supply-demand gap for a long time and people’s expectations of growth have been fixed very low. In addition, intense price competition caused by a strong yen and the emergence of strong competitors such as the BRIC nations have brought our manufacturing industries and others into peril.
The LDP government adopted “Emergency Economic Policy Measures toward the Restoration of the Japanese Economy” at a Cabinet meeting on Jan. 15 in order to overcome this crisis. These measures consist of “three arrows” – a bold and determined active monetary policy, a more resilient fiscal policy, and a growth strategy to encourage private investment.
The reference to “three arrows” originates in a story about Mori Motonari, one of the most powerful warriors from Hiroshima during the era of civil wars in the 16th century in Japan. The story is as follows:
Just as in this episode of the “three arrows”, each individual policy mentioned in the “Emergency Economic Policy Measures” – monetary policy, fiscal policy, and growth strategy – may not necessarily be quite effective by itself. But together these three policies’ impact should be enormous.
Let me explain the details of these emergency measures.
1. Accelerated restoration from the disaster and strengthening disaster-proof
functions
The important measures to achieve these policy goals are as follows:
Accommodation of social infrastructure and adoption of necessary measures to encourage the settlement of residents in the disaster-hit areas; restoration of industries and creation of job opportunities in these regions; promotion of prompt recovery from the nuclear disaster, reconstruction of infrastructure to protect residents’ lives and livelihoods (such as measures to deal with the deterioration of the old infrastructure, and strengthening disaster-proof systems prior to a disaster to reduce damage in advance); accommodation of self-defence systems for socially important infrastructure; promotion of disaster-proof measures to increase the earthquake resistance of schools and prevention of the deterioration of school buildings due to their age; and strengthening the system of governance to cope with large disasters.
We will accelerate the speed of restoration of our disaster-hit areas by consolidating the governance system for restoration from the Great East Japan Disaster in accordance with the interests and views of those residents living in the disaster-hit areas.
We will prioritize countermeasures against the deterioration of the social infrastructure caused by its aging. We will also in general strengthen social infrastructure all over Japan through amelioration of industrial as well as welfare infrastructure, and thus realize a more consolidated protection of the land to ensure the safety and security of the nation and the foundation of strong facilities for economic growth.
2. Resilient management of fiscal policy
We will try to avoid further recession by active and resilient fiscal policy management as well as clarifying the administration’s strong commitment to correcting the trend of yen appreciation and enabling the economy pull out of a deflationary state as soon as possible, thus eliminating deflationary expectations.
To achieve this, we will adopt what we call a “15-months budget” – the sums of a large supplementary budget and the budget for fiscal 2013 – to prevent the economy from getting into further recession through continuous stimulus. In particular, we will concentrate budget expenditure on areas contributing to sustainable growth or areas expected to achieve expansion in the future and among these policies we will prioritize those with immediate effects and that create strong new demand.
Meanwhile, in order to realize a substantive effect from these policy measures upon the economy as quickly as possible, we will do our best to achieve a prompt execution of our policies through early announcement of bidding for public works and simplification of bidding procedures and others for concluding contracts, and through active use of an advance payments system.
In this 15-months budget, we will revise the fiscal 2012 budget formulated by the previous administration as much as possible and secure necessary fiscal resources including public bonds, and make it most effective and efficient. On the fiscal 2013 budget, we will be soon engaged in its formulation after the provision of revised requests for budget allocations in accordance with Prime Minister Abe’s guidelines announced on Dec. 26 and 27 last year, in attempting to realize the revival of the Japanese economy in accordance with the goal of ameliorating public finances.
We will also build up a cooperative framework to achieve a strengthened alliance between the government and the Bank of Japan in tackling deflation as soon as possible. We strongly expect the BOJ to implement an active loose monetary policy under a clear target for inflation.
In addition to such measures, we will continue to watch exchange rate fluctuations and respond to them appropriately.
3. Practice of growth strategy
We will need to realize the following specific policies to achieve economic growth:
1) Promotion of private investment to strengthen competitiveness as well as for energy conservation and utilization of renewable energy sources, and promotion of R&D, innovation, and accommodation of infrastructures to strengthen international competitiveness, natural resources and marine development
2) Support for SMEs, and promotion of agriculture, forestry and fisheries exports
3) Support for Japanese businesses engaged in global business development
4) Revitalization of financial and capital markets
5) Human resources development and adoption of the measures to ensure employment opportunities
We will aim to realize “a nation that private business considers the best to do business in” and “a nation where each individual can fully realize his potential and where employment and income are growing”. At the same time, we will aim to promote a strategy to return the profits earned from FDI (Foreign Direct Investment) to the Japanese market and thus lead it to growth, and realize “a nation of hybrid economy” where the two growth engines – trade and FDI – could produce a mutually beneficial multiplying effect. They would help restore the dynamism of the Japanese economy and create wealth through sustainable growth supported by private investment in leading technologies or innovative R&D encouraged by appropriate use of fiscal and tax policies, regulatory reform, and monetary policy tools.
Development of new markets and job creation will be the most important goals to be achieved by these policies. Human resources development and increased employability of young people, and a business environment enabling people to pursue business success, will be well supported. Revitalization of SMEs and local economies by strengthening the competitiveness of agriculture, forestry and fisheries, as well as promoting tourism, will also be important.
An ambitious regulatory reform in sectors with high growth potential would have a large positive impact upon business by facilitating necessary preparations for it.
In addition to all this, we would revitalize financial and capital markets and try to activate private investment by providing risk money, including finance directed by policy as a stimulus to sectors contributing to sustainable growth.
4. Headquarters of new economic policy management to restore Japanese economy
In achieving the policies mentioned above, the Headquarters for the Restoration of the Japanese Economy will be a control tower and in cooperation with the Council of Industrial Competitiveness organized at the initiative of the Headquarters they will try to implement economic policy measures and a growth strategy to escape from longtime continuing yen appreciation and deflation, and realize expansion of employment and income and eventual restoration of the economy.
At the same time, we will recreate a Council of Economic and Fiscal Policy Advisors and it will be engaged in a wide range of policy issues including a long-term guideline on economy and public finance, or a basic direction for budget formulation in close alliance with the Headquarters.
Each of them will be expected to indicate to all the ministries specific issues to be solved promptly and achieve their solutions as quickly as possible under their leadership in close cooperation with the Council for Science and Technology Policy, the National Council for Social Security Reform and the newly founded Council for Regulatory Reform. All the ministries must cooperate among themselves regardless of their jurisdictions and try to find solutions for each issue.
I believe that the integration of these policy efforts overall will produce an enormous impact. I also believe that it will be increasingly important that the Japanese government and BOJ work closely together on monetary policy.
In this context, I would like to touch upon a joint communiqué made public on Jan. 22 titled “Policy Alliance between the Government of Japan and the BOJ to Realize an Escape from Deflation and Achieve Sustainable Economic Growth”.
I would like to introduce it as follows.
1) The policy alliance between the government of Japan and the BOJ will be strengthened to achieve a prompt escape from deflation and sustainable growth under price stability.
2) The BOJ will manage monetary policy with the aim of achieving healthy development of the national economy by realizing price stability and will also be responsible for securing the stability of the financial system. In doing so, assuming that prices will be affected by various factors in the short run, they will be aiming at sustainable price stability.
The BOJ will recognize that as efforts made by a wide range of economic entities evolve to strengthen the competitiveness and growth potential of the Japanese economy, price increases will occur within the range of a sustainable and stable inflation rate.
On the basis of this perception, the BOJ will set a 2% increase rate for the consumer price index (CPI) over the previous year as a target for stable inflation. The bank will promote a loose monetary policy under this inflation target and aim to achieve it as quickly as possible.
Assuming that it will take a certain amount of time for monetary policy to have a tangible impact upon the economy, the BOJ will also check for risk factors, including the accumulation of financial imbalances, and will confirm if any problem is being caused with regard to securing sustainable growth.
3)
The government of Japan will strongly promote specific measures to strengthen the competitiveness and growth potential of the Japanese economy by achieving structural reforms in the economy as well as working on resilient macroeconomic policy management. These specific measures include intensive investment in innovative R&D, strengthening the foundations for innovation, bold and ambitious regulatory reforms, and utilization of the tax system. These will all be initiated by the Headquarters for the Restoration of the Japanese Economy and will be fully implemented.
The government will also seek to establish a sustainable public finance structure in order to secure trust and confidence in fiscal policy management in strengthening its alliance and cooperation with the BOJ.
4) The Council of Economic and Fiscal Policy Advisors will regularly check on macro-policy management, including monetary policy, the current situation and outlook for prices, economic and fiscal situations including employment, and the achievement of economic structural reforms.
Resilient growth of the Japanese economy can be realized with these fiscal and monetary policies.
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