However, when the Japanese economy began to recover after the burst of the financial bubble, the government and the BoJ quickly resorted to austerity policies, and nominal GDP did not expand from an average of JPY525trn. If the business pie did not expand, it was rational for companies to not stop cutting costs, to keep investment to a minimum and to continue relying on a surplus of workers and low wages. As a result, the corporate savings rate continued to remain in unusually positive territory. Japanese policymakers have failed to fulfil their responsibility to sustainably expand the size of the economy in terms of nominal GDP.
It is not difficult to determine how much constant fiscal spending is insufficient to sustainably and firmly expand the size of the economy in terms of nominal GDP. Until now, no matter how much the corporate savings rate has moved, the automatic fiscal stabiliser has guided net domestic fund demand to exactly around zero percent. The Japanese fiscal authorities are extremely competent in that they have been able to control it well. In order to achieve a sustained nominal GDP expansion of about 3%, a net domestic fund demand of about - 5% is likely to be required. It is necessary to expand fiscal spending by 5% (of GDP) on a permanent basis to shift the trend of net financing demand vertically from 0% to -5%. With sufficient net financing demand, the economy would become a high-pressure economy. As the predictability of firms with sustained nominal GDP expansion increases, the firms’ savings rate would decline firmly as firms increase their investment. If it declines to a normal negative level, the deflationary structural stagnation will be over.
While it is difficult to adjust fiscal spending in a flexible manner, it should be possible to expand fiscal spending on a permanent basis in order to change what has been guided to 0% to -5%. If the expansion of fiscal spending encourages corporate spending, the fiscal burden will be smaller. This is consistent with the policy of solving social issues that are hindering investment and growth through aggressive fiscal measures, including government investment in growth. It is just a lack of understanding to say that net domestic fund demand cannot be used as a guide for fiscal policy because it can only be known ex post, and it has already been proven that the ex post 5% shortfall is already there.
If the corporate savings rate declines further to -5%, the fiscal balance needed to achieve a net domestic fund demand of -5% would be 0%, and the country would be out of deficit. If fiscal consolidation aimed at achieving a fiscal surplus is pursued despite weak net domestic fund demand, businesses would be forced to delegitimise, and the result would be a reversal of the original plan, with the budget deficit ballooning due to the worsening of the economy and deflation. If net domestic fund demand exceeds -10%, as in the US and the UK, it would be over-inflated and inflation would become a problem, necessitating fiscal austerity.
