In The N Ews

Japan Tries a Fiscal Stimulus

In the 1990s, Japan experienced a long and deep recession. As the decade was coming to a close, it looked like an end might be in sight, in part because the government was using fiscal policy to expand aggregate demand.

In the 1990s, Japan experienced a long and deep recession. As the decade was coming to a close, it looked like an end might be in sight, in part because the government was using fiscal policy to expand aggregate demand.

The Land of the Rising Outlook: Public Spending May Have Reversed Japan's Downturn

By Sheryl WuDunn Nakanojomachi, Japan—Bulldozers and tall cranes are popping up around the country like bamboo shoots after a spring rain, and this is raising hopes that Japan may finally be close to lifting itself out of recession.

No other country has ever poured as much money—more than $830 billion the last 12 months alone—into economic revival as has Japan, and much of that money is now sloshing around the country and creating a noticeable impact. Here in this village in central Japan, as in much of the country, construction crews are busy again, small companies are getting loans again, and some people are feeling a tad more confident.

Japanese leaders have traditionally funneled money into brick-and-mortar projects to stimulate the economy, so the signs of life these days are interpreted by most experts as just a temporary comeback, not a self-sustaining recovery. There have been many false starts the last eight years, but the economy has always sunk back, this time into the deepest recession since World War II.

To the pessimists Japan is like a vehicle being towed away along the road by all that deficit spending; they doubt its engine will start without an overhaul.

Whatever the reasons for the movement, whatever the concerns for the future, though, the passengers throughout Japan seem relieved that at least the vehicle may be going forward again.

Source: The New York Times, March 11, 1999, p. C1.

tax cut to be permanent, they will view it as adding substantially to their financial resources and, therefore, increase their spending by a large amount. In this case, the tax cut will have a large impact on aggregate demand. By contrast, if households expect the tax change to be temporary, they will view it as adding only slightly to their financial resources and, therefore, will increase their spending by only a small amount. In this case, the tax cut will have a small impact on aggregate demand.

An extreme example of a temporary tax cut was the one announced in 1992. In that year, President George Bush faced a lingering recession and an upcoming reelection campaign. He responded to these circumstances by announcing a reduction in the amount of income tax that the federal government was withholding from workers' paychecks. Because legislated income tax rates did not change, however, every dollar of reduced withholding in 1992 meant an extra dollar of taxes due on April 15, 1993, when income tax returns for 1992 were to be filed. Thus, Bush's "tax cut" actually represented only a short-term loan from the government. Not surprisingly, the impact of the policy on consumer spending and aggregate demand was relatively small.

I QUICK QUIZ: Suppose that the government reduces spending on highway construction by $10 billion. Which way does the aggregate-demand curve shift? Explain why the shift might be larger than $10 billion. Explain why the shift might be smaller than $10 billion.

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