Japan stimulates economy - again.

Japan has announced another huge fiscal stimulus package to try and boost growth in the economy. Japan has tried a succession of such measures in recent years, but the Japanese economy continues to perform poorly.

The latest package has been described as an 'old fashioned short term stimulus, based on public works.' What we might call a Keynesian stimulus package. The Aggregate Demand and Supply diagram shows the hoped for effect of the measure.

 

The  brief details of the stimulus package are that the government will spend an additional US$275billion mainly over two financial years. This will boost Aggregate Demand (AD) by raising government spending (G), a component of Aggregate Demand. The government budget deficit will rise as a result. While there will be significant infrastructure spending in the package there is also going to be cash handouts to low income families.

The main aim of the package is to boost Consumption spending, the largest component of AD, which has been very slow to grow in Japan for many years. The overall effects are also expected to be short term only, a temporary boost to AD, partly to overcome any impact of the British Brexit vote on the world economy. 

The real question is will it work? This is the second fiscal stimulus package of the year in Japan and part of the 'Abenomics' approach of Japan's Prime Minister that aims to boost economy (a link explaining Abenomics is given below).

The stimulus is being made along with the supporting policies of expansionary monetary policy and deregulation and will shift the AD curve to the right. In the diagram above this shows a very successful expansionary fiscal policy that leads to non-inflationary growth (Real output rises from 0Y1 to 0Y2 with no rise in the price level.) 

However the diagram shows a simple Keynesian model. There might be crowding out, which reduces the impact of the stimulus, or if the monetarist/new-classical model holds the rise in demand will only lead to a short term output and employment boost and then inflation.

The BBC covers the story here

Abenomics is explained here

This article is most useful to IB students. It provides and excellent example of expansionary fiscal (budgetary) policy and raises the questions of effectiveness and the nature of mutually supporting macroeconomic policies. VCE students can certainly follow the logic of the policy and apply it to Australia's situation.