Policy issues regarding the Japanese economy - the great recession, inequality, budget deficit and the aging population

Yutaka Harada*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)


During 1980-90, Japan's annual real GDP growth rate was 4.6%, but which declined to 1.2% in the 1990s. While the drop in itself is a problem, at the same time it exacerbated many other problems, namely inequality, budget deficits, and the increasing burden of an aging society. Society is not concerned about income distribution when the economy is growing, but begins to worry about inequality when an economic slump shows no signs of ending. Moreover, prolonged recession magnifies inequality. With the employment situation surrounding young people worsening, there arose an inequality between those finding jobs and those unemployed. And, the prolonged recession led to a huge budget deficit and the accumulation of government debt. Tax revenue shrank, and the government repeatedly increased public investment in the form of economic stimulus measures, but the Japanese economy did not recover in a sustained fashion. Japan's low growth has already continued for 20 years. Incomes of the younger and middle-aged segments of the population have not increased. Additionally, Japan is an aging society. The aged need pensions, and medical treatment and care, costs which must be borne by younger and middle-aged segments of the population, in fact those who have not experienced Japan's prosperous times. This paper discusses issues relating to the Great Recession, inequality, and the budget deficit and burden of an aging population. Japan's Great Recession is basically explained by monetary shocks. Just the bubble and its bursting are not solely responsible for the prolonged slump. There is no empirical evidence for the assertion that certain structural problems lessened the efficiency of the Japanese economy in the 1990s. TFP (total factor productivity) in the 1990s did not decline compared with the early 1980s. Fiscal policy and the diminution of the financial intermediary function can only explain the Great Recession in small part. The absence of any real monetary policy hampered economic growth through the channels of stock prices and improvement in bank balance sheets. Using vector autoregressive models, the exchange rate was not found to be an important channel of monetary policy, but there is some evidence that it significantly affected output. On inequality problems, that among younger generations is important since it will increase inequality in the future. Japan's economy will stagnate for a long time if the young are not employed and cannot garner skills. Another important point is that the way of maintaining social stability and alleviating inequality in Japan is extremely inefficient. To construct useless dams, roads, ports, and airports is extremely costly just to give jobs to the unemployed. It would be much better to give direct assistance to those in need. There is some reason to think that a budget deficit is not so serious a problem as generally believed, and that the important thing is to cut wasteful government expenditure and not raise government revenue. While I admit this argument carries some weight, there is nevertheless good reason to think that it is necessary to reduce the budget deficit. Before the global financial crisis, Japan's budget deficit was controlled, and declining, but subsequently became uncontrollable. Additionally, and more importantly, an aging population demands more social security expenditure, which causes serious budget problems, but Japan does not seem ready to cope with such problems. The selection of these topics is subjective, but I believe that these are reflected in the Japanese concerns now. Japanese academic circles do not necessarily respond to the interests of the society, but I have tried to select papers on these topics to the extent possible.

Original languageEnglish
Pages (from-to)223-253
Number of pages31
JournalJapanese Journal of Political Science
Issue number2
Publication statusPublished - 2012 Jun

ASJC Scopus subject areas

  • Sociology and Political Science
  • Political Science and International Relations


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