• Kyodo


The Japanese government should tackle fiscal consolidation because of the diminishing results of pump-priming measures taken so far and the ballooning public debt, the Bank for International Settlements said Monday.

“While rising levels of public debt in Japan imply that overall fiscal stimulus will have to be more restrained in the future, a rebalancing of expenditures could yet pay big dividends,” the BIS said in its 70th annual report, released at its annual general meeting in Basel, Switzerland.

“Cutting back on the overdeveloped public investment side and increasing expenditure on the underdeveloped social safety net could help preserve needed confidence,” the report said.

Japan’s public investment is triple the average of 10 major industrial countries, the report said.

While the pump-priming measures “have helped to temporarily boost residential investment and reduce the number of bankruptcies, the multiplier effects of the fiscal stimuli seem to have progressively declined,” the report said.

“Financially constrained local governments have faced increasing difficulties in providing the expected supplementary measures, and the marginal efficiency and utility of the public investment projects seem to have decreased in step with the number of projects implemented,” it said.

Without the measures, however, “the downturn in economic activity would have been much steeper,” the report said.

But the fiscal stimuli — two packages implemented last year — “have not generated a sustained recovery in private demand and tax revenues have fallen relative to GDP (gross domestic product),” causing the public debt to mark an unsustainable rise, it said.

The outstanding balance of long-term debts held by central and local governments will grow to almost 115 percent of GDP by the end of 2000 from 105 percent a year before, the report said.

Japan as case study

FRANKFURT (Kyodo) Japan’s public debate over whether to raise interest rates, which are now effectively at zero, provides a rare case study for the world now that many countries have recently adopted inflation-targeting regimes, the Bank for International Settlements said Monday.

In a report submitted to its annual general meeting in Basel, Switzerland, the BIS said, “The recent experiences of Japan provide a rare opportunity to assess the importance of the fact that nominal interest rates cannot fall below zero.”

The report noted that the Bank of Japan turned down the idea of setting a numerical inflation target in view of the negative aspects of inflation, the difficulty of controlling an inflationary outburst, and the fact that the economy was already showing signs of recovering.

Pointing out that the Japanese debate over inflation targeting differed from the debate in other countries because at issue in Japan’s case was whether to seek a rise in prices, the BIS inquired into credibility problems associated with adopting such a policy.

Adoption “could raise credibility problems since it might be difficult to persuade the public that the central bank had sufficient tools to raise inflation to the targeted band if prices actually started falling,” it said.

The BIS, the central body for central banks around the globe, also pointed out that historical episodes of zero nominal interest rates have been limited essentially to the United States in the late 1930s and Japan last year.

Both cases “occurred in situations where massive dislocation in the financial sector exerted sharp contractionary pressure on the economy,” so they may be “arguably better interpreted as highlighting the importance of maintaining a sound financial system,” it said.