A Study Of Japan’s Fiscal Policy During The Period Of Rapid Economic Growth

Between the end of the Second World War and mid-1950s, Japan underwent thephases of tilt production and industrial rationalization in its economic field. After that,this nation witnessed almost two decades’ rapid economic growth from1955to1973,and its economic aggregate had surpassed the advanced industrial countries in Europe,ranking second to the USA as the largest economic community in the world. Theeconomic growth was dramatic enough to arouse enormous interest from theeconomists worldwide, whose studies have suggested similar conclusions with onlysubtle divergences. Among everything else, no one failed to notice the leading role ofthe government in guiding economic growth. During the period of rapid economicgrowth, the Japanese government honored market competition, guided andencouraged non-governmental investments according to the growth plan developed inadvance; meanwhile, fiscal and financial measures were taken to provide support soas to guarantee effective development of economy. Currently, China’s social andeconomic situations are amazingly similar to those of Japan in that period in manyaspects, such as, rapid economic growth, market economy, government’s leading rolein socio-economic life, and so forth. All these similarities suggest the practical valueof studying Japan’s fiscal policy, which gives this dissertation its significance.Relevant documents and papers have manifested that fiscal policy is one of thekey measures for a government to implement macro-control over its economicdevelopment. Economists from different eras offer varied opinions on how muchinfluence fiscal policy could exert on a nation’s economy. Classical economists singhighly of free-enterprise economy. From their perspective, the less intervention fromthe government, the better it is to the economic development. Hence, they advocatethat government should lessen its intervention in free market. John Maynard Keynessummarized the reasons of the Great Economic Crisis and offered remedy for it. Henoted the Great Depression was basically caused by inadequate effective demand,which could be increased if the government implemented deficit fiscal policy, for themultiplier effect would promise a multifold increase of national income.Keynesianism used to be popular in the western economic world and held dominantposition for decades, so when Japan began the period of positive fiscal policy half acentury ago, it fit into the law of development and consequently reaped great financialprofits in that certain historic period. However, it was a different case in the1970s.Partly because of the strengthened yen, and partly because of the Energy Crisis,Japanese economic growth began to slow down, starting the phase of a long-termstable growth. Like other countries, Japan also suffered from stagflation, and theeconomic growth rate fell and inflation increased. The inertia of positive fiscal policy exposed all the drawbacks possible. Japan fell hugely in the red while governmentdebts kept growing. Consequently, the policy became a burden for Japanese economy.Since then, monetarists and New Classic Economists strove to enrich the fiscal policytheory.As one of the most important components of financial theory, fiscal policy has arelatively complete theoretical system, microcosmic and macrocosmic, based ontheoretical study and financial practice. In this dissertation a comprehensivedefinition is proposed, i.e. fiscal policy refers to the economic measures that agovernment undertakes to influence specific micro-main bodies like sectors,industries and enterprises, to adjust aggregate demand to reach a balance with theaggregate supply, and to use taxation and fiscal expenditure to achieve certain aims.This definition indicates two indispensable fundamental aspects of fiscal policy---the goals and the means. Fiscal policy goals include economic growth, increasedemployment rate, stable price and balance of international payment. During the rapideconomic growth period, Japan gave top priority to develop its national economy forthe need of economic growth was far more urgent than the other three, though it paidfor this policy later (considering the high inflation rate during economic boom). Themeans of fiscal policy generally include financial budget, fiscal expenditure and fiscalrevenue, of which Japan took full use and succeeded in establishing its rathercomplete investment and financing system, a substantial complement to the majormeans of fiscal policy. Basically, Japan took full advantage of the means of fiscalpolicy like financial budget, fiscal expenditure, fiscal revenue, and investment andfinancing system, which, combined with the multiplier effect of fiscal policy, realizedthe goal that Japan set up to develop its national economy rapidly.Based on extensive reading, the dissertation reveals that the majority of thestudies on Japan’s fiscal policy have literally start with Japan’s fiscal system, focusingon the detailed analysis of financial budget, fiscal expenditure, and fiscal revenue.Such organizational structure is insufficient since it fails to correlate fiscal policy witheconomic growth in the research, thus, the conclusions will be barely related. Toavoid problems like this, this dissertation attempts to study three decisive componentsof fiscal policy---infrastructure expansion, industrial structure upgrading, and landdevelopment, in the expectation to figure out the way Japanese government drawssupport from the three and realized its goal for rapid economic growth during thatperiod. Studies find Japan has offered the same support to the three sectors as well.The supporting system consists of (1) financial budget, including both generalaccounting budget and special accounting budget,(2) taxation, including offeringpreferential tax policies to certain industries or enterprises, and implementing“selective tax”,(3) investment and financing loan. This system has become animportant source of tax for Japanese infrastructure expansion, industrial structureupgrading, and land development.In infrastructure expansion, tax and government loans are the major income forthe general accounting budget. But when it comes to special accounting budget, Japanhad particularly designated the orientation of infrastructure expansion---railways,roads, ports, airports and alike. Naphtha tax and automobile weight tax were especially established to enhance the development of public road construction. TheJapanese fiscal investment and financing system had spared no effort to encourage thecountry’s infrastructure expansion. The government took initiative to set up businessgroups like Japanese Railway Construction Group and Japanese Road Company, andon the other hand, it had lent socially collected funds to them as loans with lowinterests or even no cost to help with the infrastructure construction.As for industrial structure upgrading, with the shift from textile industrializationto heave and chemical industrialization, Japan’s primary industry diminisheddramatically, while the second and tertiary industries began to rise, when Japaneseindustry characterized supererogation, which had been significantly influencedespecially by some fiscal policy measures like preferential tax and the system ofinvestment and financing. In this period certain Japanese industries enjoyed theprivilege of preferential tax and reduced incorporate tax, their tax burden wassignificantly lessened. Accelerated depreciation had helped with the equipmentupgrading, introduction and development of new techniques; hence Japan could enjoythe fruit of the Third Technological Revolution earlier than others, and as a result ofthat, the overall technological level in Japan was greatly improved. In the investmentand financing system, the government granted loans to the Development Bank andExport-import Bank, indirectly giving financial aid to the industries it intended tosupport. The Development Bank of Japan mainly loaned to industries like steel,shipbuilding, machinery, electronics, and chemistry. Whilst the Export-import Bankmainly loaned to those businesses of importation and exportation, and the loans werelong-term and low-cost. This policy served the large-scaled equipment exportbusinesses, which effectively boosted the exportation of Japanese enterprises.As for land development, Japan recognized the importance of the balanceddevelopment of its land quite early, and the milestone was the “Land DevelopmentLaw” issued in1950. Benefiting from the point-line-area-body multiphasedevelopment, now Japan has basically realized a balanced development of her land.Land development features public character, so government must play the role of aguide, and fiscal policy has substantial importance. In the general accounting budget,the central government set up the “Homeland Security Development Fee” particularlyto encourage land development and homeland security, and this took up a greatproportion of general accounting budget as high as17%in average every yearbetween1955and1973. Local land development fee took the form of constructioncharge, which in average accounted for about20%of the annual local expenditure. Inorder to stimulate local governments to develop land, the Japanese centralgovernment transferred the payment to local government by means of treasurypayment and regional tax, and it also allowed the local government to raise funds for land development by issuing local bonds. The underdeveloped areas could also enjoyexceptional preference to increase the fund raised for construction.Japan’s fiscal policy has exerted tremendous influence on Japan’s infrastructureexpansion, industrial structure upgrading and land development during the rapideconomic growth period. Japan’s fiscal policy served as a good example and itssecrets for success can be concluded as following: Firstly, implementation of fiscalpolicy must not jeopardize market competition system. Though the Japanesegovernment had played a significant role in economic growth, however, it respectedmarket competition and protected market economic system rather than enforcedstrong intervention. Secondly, it developed a complete fiscal policy system,including financial budget, fiscal income (especially taxation policy), fiscalexpenditure (especially transfer payment), as well as the investment, financing andloan system. Combined together, these policies had contributed to the development ofinfrastructure or critical sectors, and thereby boosted the development of other sectors.Of course, fiscal policies have drawbacks, such as government’s invention into itseconomic life was overly broad, which wasted off much of fiscal expenditure, andresulted in the failure to make both ends meet. Naturally, the unavoidable increase ofgovernment debts would invite too much economic burden for the government to bearwhen economy recessed. On the other hand, too much emphasis attached to economicgrowth could lead to inferior quality of living, deterioration of environment, frequentpublic nuisance, and so on. Accordingly, China’s fiscal policy can learn from theJapanese one selectively by absorbing its essence while discarding its dross at thesame time, which will be significance for the healthy development of Chineseeconomy.