Framework for Fiscal Consolidation – Successes and Failures in Japan

Abstract

Japan’s experience in fiscal consolidation is dotted with successes and failures. The success in terminating deficit-financing bond issuance in 1990 has been played down as a mere by-product of the bubble economy. The role played by luck cannot be denied, but steady efforts for spending cuts and revenue increase in the late 1980s were equally important. The efforts made in the late 1990s were generally believed to have failed, because it was implemented untimely. However, it has now been gradually accepted that the increase in consumption tax rate in 1997 did not severely affect the economy by itself. If there was an error in judgment, it was the drive towards the enactment of the Fiscal Structural Reform Act, the structure of which was too rigid, in an economic environment where troubles could have been foreseen. This short article first traces historic developments of Japan’s fiscal conditions, and then analyses factors that made the efforts in the 1980 a success and those that made the efforts in the 1990 a failure. It also looks at the ongoing reform efforts in a forward-looking manner.