Japan: Selected Issues

Abstract

Japan: Selected Issues

Reflating Japan: Time to Get Unconventional?1

We simulate staff’s reform scenario and contrast it with advice from Krugman, Svensson, and Turner. Staff’s recommended set of policies has a higher probability of lasting success by directly targeting wage-price rigidities through incomes policies. It is less risky by making steady headway with fiscal consolidation through very gradual consumption tax hikes. Finally, it avoids triggering a rise in the risk premium (even a modest increase would eliminate the benefits of the alternative proposals).

A. Introduction

Ever since Japan entered the liquidity trap, a variety of policy proposals have been put forward to reflate the economy. In a nutshell, these proposals include:

  • Krugman (2015) appears skeptical about the effectiveness of quantitative easing and policymakers’ ability to engineer a jump in inflation expectations. Instead, he advocates highly expansionary fiscal and monetary policy (a stimulus of 5 percent of GDP and inflation well above 2 percent) to reach “escape velocity” that would bring about higher aggregate demand and inflation, in part inflate the debt away.

  • Svensson’s “foolproof way” to end deflation consists of implementing: 1) an upward-sloping price-level target path; 2) an initial depreciation, followed by a crawling peg of the currency to reach the desired price-level target; and 3) an exit strategy in the form of the abandonment of the crawling peg in favor of inflation or price-level targeting when the price-level target path has been achieved.

  • Turner (2015) suggests monetizing the (higher) fiscal deficit, financed by an irredeemable, non-interest-bearing asset of the government to the central bank.2 Technically, this financing could be performed in three ways: (a) a direct credit from the central bank to the government’s current account, (b) an interest-bearing debt issued by the government, which the central bank purchases and then converts to a non-interest-bearing non-redeemable asset; or (c) through the issuance of interest-bearing debt which the central bank perpetually rolls over while remitting to the government as profit the interest income it receives from the government. Tuner argues that while technically straightforward, monetization could be abused by politicians in the future.

Staff has suggested a more comprehensive policy package, the “three arrows plus policy package.” The package aims to put the Japanese economy on a higher sustainable real and nominal growth path, eliminate deflation risks, restore fiscal sustainability, and enhance the shock-absorbing capacity of the economy. The most innovative element of the package is an incomes policy to directly control wage growth in the economy and induce cost-push inflation, but all elements are designed to be coordinated and complementary; i.e. monetary easing and near-term fiscal stimulus boost demand, gradual increases in the VAT rate keep the risk premium in check, structural reforms raise expectations of future demand, which all combined gives firms an incentive to comply with the incomes policy.

B. Methodology

All simulations in this paper are based on the Fund’s Flexible System of Global Models (FSGM).3 Each FSGM module is an annual, multi-region, general equilibrium model of the global economy combining a mix of micro-founded and reduced-form formulations of the various economic sectors. Each country/regional block is structurally similar, but each has its own steady-state ratios and behavioral parameters.

In the FSGM module for Japan, real GDP is determined by the sum of its demand components in the short run, and the level of potential output in the long run. The key price level, the consumer price index (CPI), is modeled by a Phillips curve.

Consumption is determined partly by forward-looking households based on the Blanchard-Weil-Yaari overlapping generations (OLG) model. OLG households take into account the expected path for government debt. In their savings decisions, they treat government bonds as wealth since there is a belief that the associated tax liabilities will fall on future generations. Saving is based also on domestic labor income, the private business capital stock, and net foreign assets denominated solely in U.S. dollars. Consumption dynamics are driven too by liquidity-constrained (LIQ) households. They do not have access to financial markets, do not save, and thus consume all their income each period. This feature amplifies the non-Ricardian properties of the model.

Private business investment is modeled on an extended version of Tobin's Q. Investment is negatively correlated with real interest rates, and positively with the output gap (a financial accelerator type mechanism). Firms choose their capital stock to maximize their profits.

The government spends on consumption and infrastructure, and on transfers to households. Infrastructure investment enhances productivity– for example, through improved transportation links. The government chooses a long-run level of debt relative to GDP. In order to meet the debt target, under the standard fiscal reaction function in the model, the government adjusts lump-sum transfers.

The model tracks aggregate exports and imports, and their oil, metals and food components. Exports increase with foreign activity, and imports with domestic activity. Relative international prices, incorporating exchange rate changes, affect both exports and imports.

Potential output is based on Cobb-Douglas production technology with trend total factor productivity, the steady-state labor force, the non-accelerating inflation rate of unemployment (NAIRU), and the actual capital stock.

The rate of increase in the core price index (CPIX) is determined by a Phillips curve. As well as the output gap, and expected inflation, the equation contains pass-through from the exchange rate, and from oil and food prices. Wage inflation adjusts such that the real wage returns to its equilibrium gradually, at a rate depending on the expected evolution of overall economic activity.

Monetary policy is represented by an interest rate reaction function, based on an inflation-forecast-based rule. The 10-year Japanese government bond interest rate is determined by the expectations theory of the term structure, plus a term premium.

The simulations are calculated as deviations from the baseline projections for Japan included in the July 2016 World Economic Outlook (see International Monetary Fund, 2016). Under the baseline scenario, the authorities are assumed to follow the existing policy mix of ¥80 trillion yearly QQE, the same fiscal policy including the increase in the VAT rate to 10 percent in October 2019, and unchanged structural policies.

C. Assumptions for Simulating the Three Arrows Plus Policy Package

The numerical assumptions for monetary, fiscal and incomes policies are listed in Table 1. These assumptions establish a baseline for comparison with alternative policy proposals. Structural reforms are modeled separately.

Table 1.

Assumptions for Simulating the Three Arrows Plus Policy Package

article image
Source: Authors’ assumptions.

Impact of inflation expectations shocks on core inflation (net of the impact of VAT).

Impact of wage inflation expectations on wage inflation.

In the simulation for Three Arrows Plus, we include another round of Quantitative and Qualitative Easing (QQE) by the Bank of Japan. We assume that the additional purchases of long-term government bonds (quantitative easing) by the Bank of Japan compress long-term yields, i.e. the term premium decreases. In addition, we assume that by purchasing corporate bonds (qualitative easing), the BoJ can compress the corporate risk premium too. In accordance with monetary easing, the monetary policy rate was held fixed at the effective lower bound (ELB) throughout the exercise for the whole simulation period.

Fiscal policy under Three Arrows Plus involves a gradual VAT rate increase. We assume annual increases of 0.5 percentage points, such that the VAT tax rate reaches 15 percent in 2030. This is assumed to be preannounced and fully anticipated by all agents in the economy. In order to offset negative aggregate demand consequences of the VAT-hike, and to help with the achievement of the inflation target, we add an incomes policy with a gradual increase in public wages, and a temporary increase in transfers to liquidity-constrained households.

The incomes policy is modeled through shocks to expectations of both price and wage inflation. The shocks are calibrated such that core inflation (CPIX) inflation is higher by around 1 percentage point in the first year. In line with the proposed incomes policy, the shock corresponds to an initial boost to real wages, as productivity increases are factored into wage setting behavior.

We also simulated the case where price inflation adjusts more slowly to the Three Arrows Plus policy package. In these alternative scenarios, the price inflation shock was set to a value such that the initial response of inflation is one-third and two-thirds of the Four Arrows Policy Package scenario in the first and the second year, respectively. The shock to wage inflation is also reduced somewhat, but due to the higher bargaining power it is less impacted in this scenario. Otherwise all other assumptions were held the same.

D. Assumptions for Simulating Krugman’s Irresponsible Fiscal and Monetary Policy

Krugman (2015) argues that Japan should pursue a period of Irresponsible Fiscal and Monetary Policy to deal with the ELB constraint. In order to assess the merits of Krugman’s argument, we present the results of a simulation where the Japanese authorities follow expansionary fiscal and monetary policies over the period 2017-21.

For the model simulations, the Irresponsible Fiscal and Monetary Policy is represented by a fiscal stimulus that results in a transitory deviation from a debt stabilization policy. Specific assumptions are listed in Table 2. The assumed fiscal shock builds up gradually: 2 percent of GDP in year 1, 4 percent year 2; and 5 percent in years 3 and 4. The increased government spending is equally distributed across public infrastructure investment, targeted fiscal transfers, and government purchases of goods and services.

Table 2.

Assumptions for Simulating Krugman’s Irresponsible Fiscal and Monetary Policy

article image
Source: Authors’ assumptions.

Impact of inflation expectations shocks on core inflation (net of the impact of VAT).

Impact of wage inflation expectations on wage inflation.

The irresponsible monetary policy keeps the BoJ policy rate fixed at the current level of zero for five years. This implies a significant departure from the inflation target of 2 percent. Beyond 2020, monetary policy reacts to higher output gap and inflation in order to get inflation back to target, and to provide the long-run nominal anchor that the economy, as well as the model, needs.

E. Assumptions for Simulating Svensson’s Foolproof Way

Svensson (2000) argued that Japan could end deflation by following a Foolproof Way of escaping from a liquidity trap. This policy consists of a credible commitment to price level path targeting (PLPT); exchange market intervention; measures to maintain low long-term interest rates (e.g., forward guidance, central bank long-term bond purchases); and a return to flexible inflation targeting once the PLPT is achieved.

PLPT, if implemented credibly, guarantees that inflation on average will be close to target. The policy has memory: it will react to a negative deviation that emerges in one period by targeting a positive deviation in a future period. To capture this response, we insert the deviation from the target path for the price level in the monetary policy reaction function, with a coefficient of 0.05 (Table 3).

Table 3.

Assumptions for Simulating Svensson’s Foolproof Way

article image
Source: Authors’ assumptions.

Impact of inflation expectations shocks on core inflation (net of the impact of VAT).

Impact of wage inflation expectations on wage inflation.

F. Assumptions for Simulating Turner’s Monetization of the Deficit

Turner (2015) proposes to monetize a portion of the fiscal deficit in Japan. He argues that Japan should consider a policy of running a higher fiscal deficit, which is financed by an irredeemable, non-interest-bearing asset of the government to the central bank.4 Technically, this financing could be performed in three ways: (a) a direct credit from the central bank to the government’s current account, (b) an interest-bearing debt issued by the government, which the central bank purchases and then converts to a non-interest-bearing non-redeemable asset; or (c) through the issuance of interest-bearing debt which the central bank perpetually rolls over while remitting to the government as profit the interest income it receives from the government. Non-technically, these measures amount to financing the budget deficit by issuing central bank money.

To be precise, Turner’s proposal essentially contains three elements (i) more explicit coordination between monetary and fiscal policies (helicopter money); (ii) the conversion of Bank of Japan holdings of JGBs to perpetuities; and (iii) and the forced non-remuneration of excess reserves serving as an implicit tax on the financial system. In the simulations we only cover (i); i.e. “flow monetization” and not “stock monetization,” which could also have implications for debt dynamics, financial stability, inflation expectations, and the conduct of monetary policy once objectives have been achieved.

We analyze the benefits and risks of the proposal by simulating an amended version of the FSGM. In this scenario, the Japanese authorities follow expansionary fiscal and monetary policies over the period 2017-21, and the additional fiscal deficit is financed by money creation (Table 4). By construction, in the model, interest-bearing debt is not affected by the additional fiscal stimulus: we introduce instead an irredeemable non-interest bearing liability (money) to finance the increased budget deficit. For comparability with Krugman’s Irresponsible Fiscal and Monetary Policy, we assume the same fiscal stimulus. Beyond 2022, fiscal policy reverts back to the non-money financing setup once the economy is out of the ELB and the liquidity trap.

Table 4.

Assumptions for Simulating Turner’s Monetization of the Deficit

article image
Source: Authors’ assumptions.

Impact of inflation expectations shocks on core inflation (net of the impact of VAT).

Impact of wage inflation expectations on wage inflation.

G. Three Arrows Plus Package

According to the simulations, the Three-Arrows-Plus package (excluding structural reforms) would result in higher growth and inflation than the baseline over the medium term (Figure 1, blue line). On average, real GDP growth would be 0.4 percentage point higher each year over the forecast horizon, while CPI inflation (excluding the effects of the VAT increase) would overshoot the BoJ target of 2 percent by 2019.5 The output gap would turn positive by 2019, in contrast to the baseline scenario where negative output gaps persist, while policy rates would not respond as it is optimal under these circumstances to overshoot the inflation target. The combination of higher real GDP growth, gradual VAT increases, and inflation would put the net-debt-to-GDP ratio on a downward trajectory, which would reduce the term premium marginally as markets would now consider the debt more sustainable. The REER would depreciate moderately, followed by a slight rebound in the outer years. Overall, the proposed policy would end deflation and improve moderately real GDP growth and debt sustainability over the medium term, underscoring that the ambitious targets of Abenomics can still be achieved within a relatively short time frame.

Figure 1.
Figure 1.

Simulations of the Three Arrows Plus Package

Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A011

Source: Authors’ simulations.

The assumption under the proposed policy package is that CPI inflation responds contemporaneously to incomes policy. We also investigate the sensitivity of our results to the relaxation of this assumption. This slower adjustment may reflect that firms may initially compress their margins to absorb the cost of higher wage bills in order to maintain competitiveness. Specifically, we run the following scenario where CPI inflation only reflects 33 percent of the wage inflation at time t, 66 percent at t+1, and 100 percent at time t+2 (Figure 1, red line).

The results are similar to our standard policy package, but with some delay in the adjustment process. As it now takes longer for the economy to exit deflation, the increase in real GDP through higher private investment and net exports is delayed. This slower expansion in domestic demand is, however, partly compensated by a rise in real wages, as wage inflation now rises faster than price inflation. This leads to slightly higher consumption expenditures compared to the benchmark policy package. The real exchange rate responds in a similar fashion, with an initial small depreciation followed by a slight appreciation in the outer years. Overall, aggregate demand expands by less than if CPI inflation adjusts contemporaneously to wage inflation. The slower GDP and inflation dynamics translate into a slower nominal GDP growth than under the proposed policy package, which in turn explains the smaller reduction in the debt-to-GDP ratio.

H. Krugman’s Irresponsible Fiscal and Monetary Policy

The results of these simulations are shown in Figure 2. As expected, Irresponsible Fiscal and Monetary Policy leads to higher real GDP growth and inflation. Since government debt is assumed to be financed through long-dated maturity debt at fixed nominal rates, real interest payments and real expenditures on cyclical components drop. Given the faster increase in nominal GDP growth, the net government debt-to-GDP ratio falls over the medium term. The REER depreciates faster than under our proposed policy package.

Figure 2.
Figure 2.

Simulations of Krugman’s Irresponsible Fiscal and Monetary Policy

Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A011

Source: Authors’ simulations.

This scenario, however, is not without considerable risk, stemming from market expectations of debt sustainability and future inflation. In particular, we assume that financial markets do not adjust their expectations, such that real interest rates decline, as envisaged by Krugman. However, if financial markets anticipate higher debt and inflation in the future, this will result in higher long-term nominal interest rates.

We illustrate these risks with two alternative scenarios of a 100 and 200 basis points increase in the difference between short- and long-term interest rates (the term premium) over the forecast horizon. The assumed increases in the term premium are within the actual range of variation over the period 1990-2015. Higher term premiums feed into higher cost of lending for both households and the nonfinancial corporate sector. As a consequence, consumption and investment are lower. Smaller output gaps and higher unemployment create less inflationary pressures. Even without a policy reaction from the central bank, the fiscal boost is therefore offset by the drop in private demand. As a result, if the term premium rises by 100 basis points, net government debt as a percentage of GDP eventually ends up at the same level as in the proposed policy package by 2021. If the term premium rises by 200 basis points, the debt path becomes explosive, while the REER appreciates first due to higher long-term interest rates. So, the exchange rate becomes a shock amplifier rather than a shock absorber.

Based on these results, we conclude that Krugman’s proposal critically depends on market expectations of future taxes and higher inflation. If market expectations remain unchanged, Krugman’s proposal has a more favorable outcome than our proposal. However, if market expectations adjust to higher future inflation through an increase in the term premium, the positive impact from higher inflation is offset by higher long-term nominal interest rates, keeping real rates unchanged or higher.

I. Svensson’s Foolproof Way

Svensson (2000) argued that Japan could end deflation by following a foolproof way of escaping from a liquidity trap. This policy consists of a credible commitment to price level path targeting (PLPT), an exchange rate intervention policy supported by other policies to maintain low real long-term interest rates, and a return to flexible inflation targeting once the PLPT is achieved. The PLPT serves to help raise inflation expectations temporarily above longer-term inflation objectives and, more importantly, to prevent long-term inflation expectations from ratcheting upwards. The higher inflation expectations over the medium term will be successful in reducing real interest rates and stimulating domestic demand provided that the BoJ can employ other measures to maintain low nominal longer-term interest rates.

A practical implementation of the basic approach outlined by Svensson has been successfully adopted in the Czech Republic when the economy was constrained by the ZLB (see Alichi and others, 2015a,b). However, implementation in Japan would have important complications that might make this policy package less successful than in the Czech Republic. The MoF is legally in charge of exchange rate policy and the BoJ is not allowed to intervene in the foreign exchange market. At a minimum, the implementation of the Foolproof Way would require close coordination between the MoF and the BoJ or an amendment of the central bank law. We abstract from these legal impediments in the simulations below. In addition, the Japanese economy is less open that the one in the Czech Republic. As a result, the BoJ may have to rely more heavily on the exchange rate and other policies to credibly maintain long-term real interest rates low. Finally, there are important perceptions that this might be a beggar-thy-neighbor policy and would require the support of other countries especially in the current environment of global deflationary pressures and weak growth.

If market participants firmly expect a higher future price level, the nominal exchange rate depreciates immediately. This would be supported if necessary under the Svensson program by official market intervention. To represent such an effect in the simulations, we add a shock to the FX premium.

In contrast to Krugman’s Irresponsible Fiscal and Monetary Policy and Turner’s Monetization of the Deficit (Section J), this policy does not constitute a major departure from a flexible inflation targeting framework. Its distinctive feature is to use the exchange rate as an instrument to achieve the PLPT path. As the economy exits deflation, monetary policy is assumed to go back to inflation targeting using the short-term interest rate as the main instrument to manage the short-run inflation-output trade-off.

The results of these simulations are shown in Figure 3 (red line). As expected, the Foolproof Way also leads to an overshoot in inflation. The depreciation in the currency and the measures to maintain low longer-term real interest rates generate a 1.5 percent positive output gap. If the PLPT path is credible, both inflation and wage inflation expectations gradually adjust. The depreciation and the reduction in real interest rates help to jolt the economy out of deflation, Lower interest rates and higher tax revenues put the government debt-to-GDP ratio onto a gradually decreasing path.

Figure 3.
Figure 3.

Simulations of Svensson’s Foolproof Way

Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A011

Source: Authors’ Simulations.

Compared to our proposed policy package, the Foolproof Way delivers higher output, lower net debt and a slightly smaller inflation overshoot if long-term rates do not adjust to expected higher nominal interest rates.

As such, results crucially depend on how long-term interest rates evolve. We consider an alternative scenario where the BoJ aims for a more gradual increase in inflation, and where the special measures fail to prevent a rise in long-term interest rates. In this case, much of the positive impact of Svensson’s Foolproof Way fades: the outcome is lower inflation and higher debt than under our proposal (Figure 3, black line).

J. Turner’s Monetization of the Deficit Scenario

We analyze the benefits and risks of Turner’s proposal by simulating an amended version of the FSGM.6 In this scenario, the Japanese authorities follow expansionary fiscal and monetary policies over the period 2017-21 and the additional fiscal deficit is financed by money creation. By construction, interest-bearing debt is not affected by the additional fiscal stimulus. Specifically, we assume the same fiscal stimulus as in Krugman’s irresponsible fiscal and monetary policy scenario. Beyond 2022, fiscal policy is assumed to revert back to the non-money financing setup once the economy is out of the ZLB and the liquidity trap.

We also assume that throughout the projection period, the BoJ keeps its policy rate at the current level. As with Krugman’s scenario, this scenario also implies a significant departure from the inflation target of 2 percent. As the economy departs from the ZLB, monetary policy starts reacting to higher output gap and inflation in order to get inflation back to target.

The results of these simulations are shown in Figure 4. Monetization of the Deficit does stop deflation, and boost real GDP growth. As the fiscal stimulus is assumed to be financed by non-interest bearing debt, nominal interest payments remain constant and the real debt burden therefore falls. Higher nominal income leads to higher (nominal) tax revenues. The net government debt-to-GDP ratio falls over the medium term by around 30 percentage points, despite the fiscal expansion. The REER depreciates to provide an additional stimulus to the economy.

Figure 4.
Figure 4.

Simulations of Turner’s Monetization of the Deficit

Citation: IMF Staff Country Reports 2016, 268; 10.5089/9781475522525.002.A011

Source: Authors’ simulations.

Overall, Turner’s proposal would give a stronger boost to the economy than our proposed package. However, it implies a significant departure from the existing monetary policy framework, under which the official BoJ inflation target of 2 percent in principle provides a nominal anchor. This means more uncertainty. The major risk stems from market expectations of higher inflation, as the commitment from the authorities not to resort again to monetary financing may not be credible. It may also be the case that politicians start using the monetary financing of the deficit as an excuse to delay fiscal consolidation (e.g., VAT increases). In other words, market participants might expect further fiscal stimulus in the future, again financed by monetary expansion. This gives rise to the specter of “fiscal dominance,” where the financing needs of the government override the inflation control objective of the central bank. An inflation scare would be more protracted if this type of policy lacks a proper long-term macroeconomic framework. It would result in higher long-term nominal interest rates, through an increase in the term premium and a ratcheting up of inflation expectations. The central bank would then need to tighten, to bring inflation expectations back under control.

We illustrate these risks with two alternative scenarios. In both, we assume the inflation scare to translate in a 400 basis points increase in the term premium and a 1 percentage increase in inflation expectations. The two alternative scenarios differ to the extent that a) the BoJ does not respond to the inflation scare; and (b) the BoJ does respond, starting in 2019. In both scenarios, the inflation scare does not directly feed into higher interest rate payments of the government, but has a considerable impact on the rates faced by the private sector (both households and the nonfinancial corporate sector). As a consequence, both private investment and consumption are lower than in the scenario without higher term premiums. Lower output gaps and higher unemployment create less inflationary pressures. In the scenario where monetary policy reacts after 2019, lending rates rise even more sharply and the anti-inflationary monetary policy eventually leads to a drop in output and consumption, together with an appreciation of the REER. The net government-debt ratio still ends up at a lower level, compared to the Three-Arrows-Plus package. But inflation substantially exceeds the target for a more prolonged period, and output growth is lower, and less stable.

Turner’s proposal for monetization of the fiscal deficit therefore critically depends on market expectations of future inflation, and how monetary policy would handle these risks. If market expectations remain unchanged, Monetization of the Deficit implies significantly lower debt and higher output and inflation than Three Arrows Plus. However, if market expectations adjust to higher future (fiscally-induced) inflation through an increase in the term premium, and monetary policy then pursues an anti-inflationary policy, the macroeconomic costs might well offset the benefits of lower interest-bearing debt.

K. Conclusions and Policy Implications

In this chapter, we propose a comprehensive policy package to end deflation in Japan. The policy package builds on the authorities’ current three-arrow approach. We propose to bring the three arrows together in a coherent and comprehensive package. We argue that both monetary and fiscal policies have to be embedded in long-term frameworks that deal with uncertainty and anchor private sector expectations about the behavior of inflation and public debt, over the long run. We also propose to add incomes policy as an extra arrow. This is in line with the practice in the US that contributed to ending the Great Depression in the 1930s. We also show through a series of simulations how the proposed package may be more likely to succeed than other proposals as it mitigates the risk of an adverse response from the private sector.

The policy challenge to end deflation in Japan is formidable. As shown by the experience over the last 25 years, a separate instruments’ approach will not succeed. It is essential instead to use multiple coordinated instruments, in a framework that over time ensures stability of inflation and a sustainable path of government debt.

References

  • Alichi, A., J. Benes, J. Felman, I. Feng, C. Freedman, D. Laxton, E. Tanner, D. Vavra, and H. Wang, (2015a), “Frontiers of Monetary Policymaking: Adding the Exchange Rate as a Tool to Combat Deflationary Risks in the Czech Republic”, IMF Working Paper No. 15/74.

    • Search Google Scholar
    • Export Citation
  • Alichi, A., K. Clinton, C. Freedman, O. Kamenik, M. Juillard, D. Laxton, J. Turunen, and H. Wang (2015b), “Avoiding Dark Corners: A Robust Monetary Policy Framework for the United States,IMF Working Paper No. 15/134.

    • Search Google Scholar
    • Export Citation
  • Andrle, M., P. Blagrave, P. Espaillat, K. Honjo, B. Hunt, M. Kortelainen, R. Lalonde, D. Laxton, E. Mavroeidi, D. Muir, S. Mursula, S. Snudden, 2015, “The Flexible System of Global Models – FSGM,IMF Working Paper No. 15/64.

    • Search Google Scholar
    • Export Citation
  • Bernanke, B. S., 2003, “Some Thoughts on Monetary Policy in Japan,Remarks before the Japan Society of Monetary Economics, Tokyo, Japan, May 31, 2003, available at http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2003/20030531/default.htm

    • Search Google Scholar
    • Export Citation
  • Buiter, W. H., 2014, “The Simple Analytics of Helicopter Money: Why It Works – Always”, in Economics, Vol. 8, 2014-28, August 2014.

    • Search Google Scholar
    • Export Citation
  • Galì, J., 2014, “The Effects of a Money-Financed Fiscal Stimulus,Universitat Pompeu Fabra and Barcelona, available at http://crei.cat/people/gali/gmoney.pdf

    • Search Google Scholar
    • Export Citation
  • Krugman, P., 2015, “Rethinking Japan,” in The New York Times, October 20, 2015, available at http://mobile.nytimes.com/blogs/krugman/2015/10/20/rethinking-japan/

    • Search Google Scholar
    • Export Citation
  • Svensson, L., 2000, “The Zero Lower Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap,NBER Working Paper 7957.

    • Search Google Scholar
    • Export Citation
  • Turner, A., 2015, “The Case for Monetary Finance – An Essentially Political Issue”, paper presented at the IMF 16th Jacques Polak Annual Research Conference, November 2015, available at http://www.imf.org/external/np/res/seminars/2015/arc/pdf/adair.pdf

    • Search Google Scholar
    • Export Citation
1

Prepared by Pietro Cova, Xavier Debrun, Zoltan Jakab, Douglas Laxton, Joannes Mongardini, and Hou Wang (all RES), Vitor Gaspar and Constant Lonkeng Ngouana (both FAD), and Elif Arbatli and Dennis Botman (both APD). A forthcoming IMF Working Paper will elaborate further on the details of staff’s proposed policy package and the simulations.

2

Bernanke (2003), Buiter (2014) and Gali (2014) propose similar policies.

3

Andrle, M. and others (2015), “The Flexible System of Global Models — FSGM,” IMF Working Paper No. 15/64.

4

Bernanke (2003), Buiter (2014) and Gali (2014) also propose similar policies.

5

Monetary policy in the simulations is assumed to target inflation excluding the direct impact of the VAT increase. As a result, the relevant inflation comparison between the scenarios is the one excluding the direct impact of the VAT increase.

6

Following Turner (2015) we added money into the government’s budget constraint as an additional source of revenue. This is then used to purchase goods and services from the private sector. In this way, the private sector’s budget constraint is not directly affected, but only indirectly through higher (nominal) demand and fiscal transfers. One should note, however, that this treatment of money suffers several shortcomings; we abstract from liquidity services provided by money and its ability to serve as a store of value.

Japan: Selected Issues
Author: International Monetary Fund. Asia and Pacific Dept