With Japan's economy following a recovery path, how fast it should grow in coming years is a subject of vigorous debate in the government and the ruling parties. The debate, however, is being conducted largely in numerical terms, with the focus on how to set target levels for nominal growth rates (excluding the effects of price changes) and long-term interest rates. The broad policy question of how to achieve sustainable growth is left more or less on the back burner.
With the long spell of deflation now coming to an end, or so it appears, a key objective of future economic policy is to rebuild debt-ridden public finances. The government's Council on Economic and Fiscal Policy is looking to bring the budget into "primary balance" (excluding bond issuance and debt service) in the early 2010s. The council is expected to give details of this "road map" in its blueprint for "integrated reform of revenues and expenditures" to be published in June. The central question is how much taxes should be increased.
The debate on desirable nominal growth rates and long-term interest rates is welcome, since the setting of such numerical targets provides certain parameters for tax increases. The discussion, though, could end up as a numbers-juggling exercise if targets are set artificially at levels based on politically calculated tax increases "acceptable" to the general public. The economy may or may not perform as targeted. If it misses the mark, more realistic targets will have to be set, and people will suffer the consequences of readjustment.