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Sixth, the government should announce a credible medium-term
plan for reducing cyclically adjusted fiscal deficits, namely "structural"
deficits adjusted for the effects of cyclical changes on tax revenues and
expenditures. Automatic stabilizers should be allowed to work, but every
effort should be made to cut inefficient government subsidies and to make
more "productive" use of budget funds. |
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Seventh, once these government policies are in place, the
Bank of Japan should adopt the price level target to be achieved in a two-year
time horizon and announce its intention to move to a regime of inflation
targeting once the level target is achieved. Forecasts of general price
performance should be published with certain assumptions about the stance
of fiscal policy and the yen's nominal effective exchange rate which is
influenced not only by the yen-dollar rate but also by the dollar rates
of the Euro
and other currencies beyond the control of the Japanese authorities, having
implications for Japan's import prices together with changes in international
commodity prices. As price performance particularly over a time horizon
of two years or less can be influenced significantly by non-monetary factors
as well, factors both monetary and non-monetary, causing discrepancies
of outcomes from forecasts should be analyzed in quantitative terms as
precisely as possible and the results of such work should be published.
In this exercise, the research wing of the Bank of Japan should compete
with government and private research institutions. |
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Eighth Japan should advise Asian partner countries to adopt currency baskets in which the yen's weight should be raised to absorb part of shocks associated with yen exchange adjustment. |
Ninth, in the context of preparing the forthcoming economic
summit at Evian, France, the Japanese government should argue that like
in the United States, some fiscal flexibility be allowed in the European
Community countries. In particular, fiscal disciplines imbedded in the
growth and stability pact must be adjusted so that targets for budget deficit
cuts should be based on structural balances allowing for the working of
automatic stabilizers. This would help prevent the euro zone economy from
getting into recession in part arising from weaker exports associated with
the recent firming of the euro against the US dollar and the yen. |
And finally, the Japanese government should take a leading
role in the post-Uruguay round of trade liberalization including agricultural
products and services. Further opening of Japanese markets should increase
the import content of Japanese domestic demand and induce faster growth
of Japanese imports relative to the expansion of the size of the domestic
market which should grow more rapidly after a jump-start of the Japanese
economy triggered by yen exchange rate adjustment. |
Some of these policies may be painful to implement. But they
are the only way Japan can secure vital support from its trade partners
in its efforts to achieve economic recovery through exchange rate and monetary
policies. |
* Lars E. O. Svensson, " Escaping from a Liquidity Trap and Deflation:The
Foolproof Way and Others",Princeton University, CEPR and NBER
February 2003, for Journal of Economic Perspectives. |