World Economy

Japan Should Eliminate Deflationary Gap

Satoshi FujiiSatoshi Fujii

Japan should spend 10 trillion yen ($99.83 billion) on fiscal stimulus both in fiscal 2017 and in fiscal 2018 to offset a lack of demand in the economy and eliminate the risk of deflation, an adviser to Prime Minister Shinzo Abe said on Tuesday.

Abe has already compiled a stimulus package for the current fiscal year with 7.5 trillion yen in spending, but the government needs to spend more and do so quickly to boost demand, Satoshi Fujii, an adviser to Abe, told Reuters in an interview.

“We need to spend 10 trillion yen next fiscal year and another 10 trillion yen the following fiscal year to eliminate the deflationary gap,” he said.

The Bank of Japan should stick with its existing quantitative easing but should examine its negative interest rate policy and decide how to proceed in the future, Fujii said.

“The important point is the velocity of spending. The problem with fiscal stimulus up until now is the velocity of spending was not high enough,” said Fujii, who is also a professor at Kyoto University.

“There are a lot of opinions about negative rates, but I would like the Bank of Japan to review this and decide what to do from here on.”

Fujii’s comments suggest the government could rely more on fiscal stimulus and less on additional monetary easing to revive Japan’s fortunes after the economy ground to a halt in the second quarter due to weak consumption and exports.

Fujii said Japan’s deflationary gap, or the difference between actual output and output at full employment, is around 15 trillion yen, which means the government needs to boost domestic demand by the same amount.