Japan’s macroeconomic history in the last thirty years is quite complicated. Its government has been running substantial fiscal deficits for about twenty years. It seems that these have been run for Keynesian reasons, to stimulate demand. Opinions differ as to whether the ‘fiscal stimulus’ policies are necessary. One result is that Japan’s net public debt to GDP ratio is now huge – about 160 per cent, the highest in OECD. In the view of some this situation must lead to a debt crisis. This is the ‘sustainability problem’.
What are the implications for Japan’s future macroeconomic policy, given that the size of Japan’s working age population will decline drastically? Japan could get into a ‘secular stagnation’ trap. Max Corden and Sisira Jayasuriya think they have a solution: how to reconcile the possible need for continued Keynesian policies with the sustainability problem.