ABSTRACT
This chapter establishes the failure to exercise standard macroeconomic stabilization polices in Japan over the last twenty years and look at why this happened. The chapter charts a future course for fiscal and monetary policy in Japan, based on a reasonable degree of Bank of Japan (BoJ) and Ministry of Finance (MoF) coordination and sounder policy approaches in line with international norms. It argues that the institutional reform and change in bureaucratic culture to limit the potential for a repeat of macroeconomic policies to go astray for long periods. By allowing fiscal considerations to affect monetary policy, policy coordination would make the promise of higher inflation more credible. Similarly, a rapidly rising public debt-to-GDP Gross domestic product (GDP) ratio, largely driven by population ageing and an arguably unsustainable level of social security and medical expenditures, has constrained the Japanese government's open-ended use of expansionary fiscal policy.
