Japan: Betting on Inflation? – Case Solution

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Japan: Betting on Inflation? Case Answers

1.) Identify the three arrows that comprised the program and describe any concerns you might have regarding their effectiveness.

Japan has suffered from its long-term deflation, sluggish economic growth, and government’s high budget deficit-to-GDP ratio ever since the real estate and stock market bubble burst in the early 1990s.

Abe unveiled a comprehensive economic policy package known as Abenomics to overcome deflation and sustainably revive the Japanese economy.

It consisted of three arrows targeted at a) flexible fiscal consolidation, b) aggressive monetary easing, and c) growth strategy, including structure reform.

a) Flexible Fiscal Consolidation

Fiscal policy refers to government policies on spending and taxation, and the first arrow would implement its short-term fiscal policy in a timely and flexible manner. It first landed on spending a JPY 10.3 trillion stimulus package as part of the supplementary budget.

It included JPY 3.8 trillion focused on disaster prevention and reconstruction, JPY 3.1 trillion for stimulating private investment, and ¥3.4 trillion for social and regional expenditures, such as medical care, with an expectation of a 2 percent GDP increase and new 600,000 job opportunities.

However, the country’s budget and deficit should be controlled due to the high ratio between budget deficit and GDP. Thus, consumption tax increased from 5 percent to 8 percent in April 2014 and 8 percent to 10 percent in 2015.

b) Aggressive Monetary Easing

The Bank of Japan (BOJ) set a price stability target at 2%, based on the year-on-year rate of change in the consumer price index (CPI), with a government’s expectation to achieve this target within two years through Quantitative and Qualitative Monetary Easing.

Thus, an additional currency base – between 60 trillion Yen and 70 trillion yen was printed to make Japanese exports more attractive and generate roughly 2% inflation.

As a part of this initiative, The BOJ has been investing in long-run government bonds and increasing the monetary base as an expansionary financial policy contrasted with the former Government’s policy on purchasing short government bonds.

c) Growth Strategy

The government growth strategy focused on labor participation and innovative development platforms. It encouraged higher wages to expand consumption, took female participation and retirement age postponement into consideration to tackle labor shortage, invested in the senior health care system, and took measures to reduce their costs.

What’s more, it aimed to improve access to financing for SMEs (Small and medium enterprises) and boost private sector participation in public infrastructure projects to liberalize governance on foreign direct investments (FDI).

Concerns:

(1) The active fiscal policy on spending has led the government of Japan to be…