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Briefing

Japan: Fiscal Policy

Appears in: Asia/Pacific, Macroeconomy, Japan, Northeast Asia, Fiscal Policy

Critical Issues

Background:

Japan's budget deficit and public debt have grown through a combination of fiscal stimulus spending and increasing social security payouts. Gross public debt has exceeded 170% of GDP as of 2009, making Japan the most indebted nation among major economies. On one hand, premature fiscal tightening may reverse the economy back into recession—a mistake Japanese policymakers made in 1997 and U.S. policymakers made in 1937 during the Great Depression. On the other hand, the lack of a long-term fiscal reform plan, partly due to the high turnover of prime ministers, may trigger a prolonged selloff of government bonds that causes interest rates to spike. A swelling debt burden per capita will also squeeze private sector consumption and investment.

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