The Enigma of the Ineffectiveness of Fiscal Policy in the 1990s

As in other countries, Japanese fiscal policy has been the exclusive domain of the government, which proposes fiscal spending measures to parliament whose funding is detailed in budgets and supplementary budgets. In principle, the government has been following a balanced budget policy in the postwar era. The Finance Law of 1947 prohibited the issuance of government bonds. As a result of the 1965 recession, it was amended and government bonds were issued for the first time.1 Oil shock recessions and increased spending programmes produced sizeable deficits in the 1970s.2 The elimination of fiscal deficits (‘fiscal reconstruction’) has been a priority since the late 1970s, with the Finance Ministry pursuing a ‘zero [growth] ceiling’ on budget requests since 1982. Thanks to some tax rises (including the introduction of the consumption tax in 1989), high nominal GDP growth and asset price rises in the second half of the 1980s, the target of fiscal reconstruction was achieved in 1991.