Much has been discussed about the need to quickly rebuild Japan's fiscal health, in which government debts have mushroomed to more than twice the nation's gross domestic product. Among the issues discussed in the campaign for the Oct. 22 general election was the question whether the consumption tax should be hiked from the current 8 percent to 10 percent in 2019 as scheduled. The administration of Prime Minister Shinzo Abe has so far twice postponed the hike to 10 percent. In that sense, whether the government will go ahead with the planned hike in 2019 and how it plans to realize fiscal rehabilitation deserve close attention.
When Abe formed his current administration at the end of 2012, his immediate policy task was to put an end to the deflation that had gripped the nation for nearly 20 years. Deflation was at the root of the stagnation of Japan's economy, and fiscal reconstruction was impossible as long as deflation continued to keep a drag on the growth in nominal GDP. Therefore, the government and the Bank of Japan for the first time introduced an inflation target, and the central bank under Gov. Haruhiko Kuroda launched unprecedented monetary easing programs. The 2 percent annual inflation target remains elusive today. But the Nikkei average on the Tokyo Stock Exchange has surged to more than double the level when the administration was launched, and consumer prices have risen — albeit slightly.
Amid these circumstances, an interesting discussion developed over the ways of fiscal policy. The so-called Sims Theory — by professor Christopher A. Sims of Princeton University, a winner of the 2011 Nobel Prize in economics — suggests that Japan, in its efforts to bust deflation, should pursue an aggressive fiscal policy because monetary policy will no longer be effective. In Japan, the theory appears to be deemed too extreme and unrealistic. However, it is a mistake to take the Sims Theory in such a short-circuited way.