IMF World Economic Outlook and
Economic Policy Management in Japan

Letter to the Editor of the Financial Times
Published 15 May 2001
The May 2001 edition of IMF World Economic Outlook discusses alternative scenarios for adjustment of global external imbalances, based on two simulations with the IMF's macro-economic model (Chapter 1, Figure 1.17 and Tables 1.12 & 1.13). Unfortunately, there is a flaw in the simulations: Japanese short-term interest rates are now close to zero and nominal rates cannot go negative as assumed in the IMF simulations carried out to assess the output effects of external adjustment in alternative scenarios. Correct simulations with a zero constraint on nominal rates would suggest that the negative output effects of larger external adjustment should be much greater in Japan than shown in the IMF work.
A policy implication of corrected simulations would be that Japanese fiscal policy should remain flexible in the short run, at least allowing for the working of built-in stabilizers rather than rigidly limiting the maximum amount of government bond issues to 30 trillion yen in coming fiscal years regardless of cyclical positions -- a policy issue now hotly debated in the Japanese Parliament.
Mr. Koizumi should be commended for his endeavour after fiscal consolidation. But medium-term targets for Japanese budget deficit cuts should be established on a cyclically adjusted basis. Too rigid a rule on fiscal policy would run the risk of further increasing the vulnerability of Japan's already very frail economy and hence threaten world economy as a whole.
Kumiharu Shigehara
Former Chief Economist and Deputy Secretary- General of the Organisation for Economic Cooperation and Development