September 28th: Japan pursuing MonetaryAND Fiscal expansionary policies?

At the Group 20 meeting in Cairns last week, Japan’s finance minister (Taro Aso) and the governor of the Bank of Japan (BOJ) (Haruhiko Kuroda) promised the other nations that Japan would pursue growth, even though the consumption tax had been raised in April causing an unexpectedly large  fall in GDP during the second quarter of 2014.

Aso contnues to claim that Japan’s economy is on a recovery trend away from deflation, but  he conceded that demand has yet to recover and said “I want to make the economy return early to its growth path,”

It will be interesting to see what the government decides do after the key indicators for the July-September quarter (Q3) are issued. It is possible that, if GDP growth continues to be negative or sluggish, additional “growth-boosting measures” will be announced. Could it be that plans for a further hike in the consumption tax will be put on hold and/or there will be extra government spending, despite the large budget deficit?  If so, the Japanese government is espousing Keynesian fiscal policies.

Meanwhile Kuroda said the BOJ will continue its “quantitative and qualitative” easing policy launched in April 2013. The BOJ is targeting 2 percent inflation via radical monetary easing, i.e. effectively “printing money”. Clearly the Japanese government is rejecting the main tenet of Monetarist Economics that governments should not use expansion of the money supply as a means of stimulating the economy because it might lead to hyperinflation. Monetarists assert that the government should merely ensure that increases in the money supply match increases in real output.

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