NRI Papers
No. 176 August 1, 2012
  Exit Strategy for Achieving Japan's Fiscal Reconstruction  
Masaya SASAKI

Since the outbreak of the Greek sovereign debt crisis, many countries around the world, including Japan, have been strengthening their own measures to achieve fiscal restructuring. However, when Japan is compared to Greece from a macroeconomic perspective or from the viewpoint of the flow of funds, the situations facing the two countries are entirely different. Simply applying the Greek case to Japan might result in making a wrong decision in addressing Japan's fiscal problems.

From the perspective of the flow of funds, the root cause of Japan's dramatically swollen budget deficit after the bursting of the bubble economy is decreased demand for funds from companies to adjust their balance sheets and the resulting massive savings in Japan's private sector (businesses and households).

Conversely, as long as the issue of excess savings in the private sector, in particular, weak corporate demand for funds, remains unsolved, it would be difficult to pave a way to Japan's fiscal reconstruction. Even if Japan were to tackle fiscal problems with such a macroeconomic issue left unaddressed, any attempt to do so is highly likely to result in failure.

The first thing that the Japanese government must do before anything else is not to rush into fiscal reconstruction by means of reforming the social security system and increasing the consumption tax rate. Rather, the government must stimulate corporate demand for funds through measures such as increasing tax credits for capital investments and for spending on research and development activities, as well as in the shape of regulatory reform.

Given increasingly intense global competition, regardless of whether support by government policy is available, businesses must make their own efforts to survive, such as carving out new markets by strengthening research and development activities. Such efforts will eventually lead to the creation of an environment that helps Japan achieve fiscal reconstruction.

Contents
I Is Japan the Same as Greece?
II Comparison of Japan's Flow of Funds with That of Greece
III Exit Strategy for Achieving Japan's Fiscal Reconstruction

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