08/06/2020
Japan probes the limits of economic policy
Including loan guarantees, fiscal support this year will amount to 40% of GDP
In the 1990s Japan seemed to offer a cautionary tale, an example of how feckless macroeconomic management could lead to troubles that other governments had long ago learnt to avoid. By the 2000s many economists came to see it as a harbinger. The path its leaders took in their efforts to lift weak growth, chronically low inflation and near-zero interest rates has been followed, repeatedly, by others in the rich world. Japan’s trailblazing has helped reveal that the limits to extreme policy are much farther away than economists had thought at first. This path-finding may well continue. At the end of May the government announced spending plans that will take total fiscal support for the economy this year to 40% of gdp. (Because the measures include loan guarantees, the budget deficit will probably amount to less than half of that.) The colossal figure might bolster queasy politicians elsewhere. But even as it does so, Japan’s fiscal radicalism exposes the limits to what government borrowing can achieve.
Japan’s experience of covid-19 has been remarkably mild. Despite its older population, a rash of cases early in the epidemic and a reluctance to impose strict lockdowns, its recorded infection rate is among the lowest in the rich world: just 134 per million, less even than in widely touted success stories like South Korea and New Zealand. It began its battle against the economic effects of the pandemic from an especially weak position, though. In most countries the coronavirus interrupted an economic boom, but Japan’s downturn began last year. An increase in consumption tax last autumn, part of an effort to repair the government’s finances, was followed by a drastic pullback in spending. Output shrank at an annual rate of 7.1% in the last quarter of 2019, compared with the previous three months, and by 3.4% in the first quarter of 2020. As in much of the rest of the world, the pace of contraction is likely to have been far more dramatic in the second quarter.
