The Fiscal Stance in Japan: A Model-Based Analysis

Abstract

This paper assesses Japan’s fiscal stance in the past and the future with a stochastic structural model called the Buffer-Stock Model of the Government. Our retrospective analysis suggests that the fiscal stance in the 1990s and the early 2000s was overall looser than the model recommendations. As for the future, the model advises the near-term fiscal policy to be supportive with a view to narrowing the output gap and minimizing hysteresis, while recommending a fiscal consolidation over the medium-term at a gradual pace.

Keywords: Fiscal stance, cycle stabilization, government deficit, government debt, baseline model advice, near-term fiscal policy, fiscal policy path, baseline calibration, Japan's fiscal policy, B. sensitivity analysis, Output gap, Fiscal consolidation, Global, utility function, sustainability concern, interest rate-growth differential, debt level, debt buffer

JEL Classification: E32, E60, H62, H63, E62, E23