Japan has become so poor. Japan can get out of deflation and experience boom through expansive fiscal policy Chairman of AJER Seiji Ono 　After the start of Koizumi cabinet Japan's position in the world economy declined rapidly. The macro-econometric analysis shows that the deflation can be overcome and fiscal balance can be achieved by expansive fiscal policy Koizumi's structural reform made Japan poor. 　It is said Japanese economy has recovered but it can never be sufficient. Most Japanese feel their lives have become harder. This must be one of the reasons of the setback of ruling parties in the Upper House election. As you know world economy is in an excellent condition, while Japanese economy is still in deflation. According to the Annual Report on National Accounts by Cabinet Office the nominal GDP per capita in 2006 fell down to 18th in the world while in 1993 and 1994 it was number one. The rank fell down rapidly under Koizumi Cabinet. Rank No. 18th in the world corresponds to the level of 1971. 22 years were needed to raise the level from 18th to 1st. Koizumi's fiscal austerity lowered the level drastically and the level is going down still farther. 　The Japanese percentage of GDP in the world has fallen down from 17% in 1999 to 10.3% in 2005. The cause of the declining of the Japanese economy is that the nominal growth rate is too low. The Japanese GDP in 2006 is about 510 trillion yen which is almost the same as that of 10 years ago. The deflator became negative in 1994 and has been negative all the time except 1997. This means deflation lasted for this long time. The Japanese government wanted to announce the end of deflation for a long time but failed to do so up to now. 　The Japan's nominal growth rate of last year is 1.4%, which is by far the lowest in OECD's 30 member nations. The second lowest, Germany and Portugal is 3.3%, which means Japan's growth rate is less than half of that of the second lowest countries. The growth rate of France is 3.9% but they still feel the growth rate is too low and is going to stimulate the economy by large scale tax cut. 　On the contrary Japan is now tightening both the budget and monetary policy, which consequently prolongs the deflation and lower the growth rate further. In 2006 and 2007 they increased tax by 3.3 trillion yen by abolishing the temporary tax cut and they are considering raising consumption tax. They raised the policy interest rate from 0% to 0.5% and they are considering raising it further. In addition to these they announced the maximum budget cut. 　The nominal growth rate of Japan is very low but they are doing a lot of things to lower the growth rate further. What funny is Prime Minister Abe called his policy "high growth path". This is something like a slow driver uses the brake pedal while he is saying "I will speed up". 　Such sluggish economy has considerable impact on people's lives. The number of families receiving public assistance increased from 600,000 in 1996 to well above 1 million now. The number of suicides caused by hard living now is about six times as high as that of 16 years ago. Many workers lost their jobs especially because public investment was cut substantially. According to the survey by Ministry of Health, Labor and Welfare previous job of 55% of homeless people is construction work. 　The Japan's sluggish economy is caused by fiscal austerity in deflationary economy. The justification for it is that the government has too much debt and the fiscal situation is tight. In order to pay debt Prime Minister Koizumi continued fiscal austerity, which weakened Japanese economy, forced the economy in the state of deflation and lowered the Japanese share in the world GDP drastically. To make the matter worse he failed to pay debt. On the contrary he increased debt a lot.　This means the method to "pay national debt" is completely different from that of household debt or company debt. As for the national debt the econometric analyses is absolutely necessary. Surprising results by econometric analysis concerning to the expansive fiscal policy. 　The author used the macro-econometric model NEEDS made by NIHON KEIZAI SHINBUN, NIKKEI and studied the Japanese economy. The result turned out to be completely opposite to what is believed generally.　If we increase the fiscal spending, for example, tax cut or public investment, then economy grows rapidly, our lives become rich, and the debt-to-GDP ratio decreases. Increase of GDP and revenue from tax decrease the debt-to-GDP ratio. 　In order to spread these results AJER, Association for Japan Economic Recovery, was started in 2003. Inviting Professor Lawrence R. Klein, Nobel prize laureate and the authority in macro-econometric, we organized a symposium and we took him to Diet Members' Building, where he gave a talk to around 100 people, mainly Diet members. He showed necessity of the expansive fiscal policy and higher growth rate. Memorandum on questions and the answers from the government 　AJER repeatedly appealed the necessity of expanding fiscal policy in budget committee and in cabinet committee with the help of Diet Members belong to AJER. In this year a Diet Member helped us to ask the government 58 questions as a form of memorandum on questions nine times and we received answers in writing signed with Prime Minister Abe. In these answers the government admitted that based on the simulation by Cabinet Office if tax is cut or if public investment is increased the debt-to-GDP ratio decreases in the first and second years due to the increase of the nominal GDP but increase in the third years and later. However, this increase of the debt-to-GDP ratio after the third year in their simulation simply caused by the intentional raise of policy interest rate. Thus we pointed out that without such raise of policy interest rate the debt-to-GDP ratio continues to decrease. Then government changed the story. They started to insist that the simulation by Cabinet Office has too large error thus it is of no use. 　Unfortunately government is not trying to develop the economy and to solve the fiscal problem with the help of macro econometric model analysis. If so Japan's deflation does not end and Japan is getting poorer and poorer. In the sluggish economy there is no attractive investment destination thus money flows outwardly to find better one. Japan's sluggish economy must be the burden for the world economy. Japan's economic stagnation caused yen carry trade, which leads to harmful effect to world economy. Yen carry trade means that borrowing at low interest rates in yen and using the loan to buy higher yielding assets abroad. Since this disturbs the international money market Japan is now under pressure to raise the interest rate. However, the excessive raise of interest rates depresses Japanese economy. Comments by eminent economists. ●Ben S. Bernanke, Chairmen of the Federal Reserve 　Tax cut or increase of fiscal spending will stabilize the policy, by reducing the debt-to-GDP ratio. In order to finance BOJ should buy more government bond. BOJ should abolish the informal rule that BOJ should not possess long-term government bond more than the outstanding balance of banknotes issued.Japan has become so poor. ●Paul A. Samuelson (Nobel laureate in economy) 　I propose three years tax cut to Mr. Koizumi. The continuing public investment should be financed by the newly printed yen by BOJ. (Newly printed yen means the money which BOJ paid to buy government bond.) ●Lawrence R. Klein (Nobel laureate in economy) 　My proposal would be money expansion. BOJ purchases government debt. Taxes should be cut and education spending should be increased. Final remark 　Finally let us comment about what should be done in an expanded fiscal policy. 　If offshore floating wind power generation is well developed, whole electricity of Japan can be supplied only by wind energy. According to Professor Toshiaki Ohta wind mill should be constructed utilizing SCF (carbon fiber) then the cost of electricity will be less than half of that of atomic power generation. This will solve the problems such as energy depletion and CO2 emission. Copyright ©2002 - 日本経済復活の会(Association for Japanese Economic Recovery).　All rights reserved.