At the same time, macroeconomic stimulus has had less impact on the economy than expected. Because the Japanese government relied more heavily on expanded public-works spending than on tax cuts, part of the favorable impact of this stimulus has been lost. Economists usually argue that what really matters for fiscal stimulus is the size of the government deficit rather than the choice between tax cuts or spending. This choice has pushed construction activity well beyond long-term sustainable levels. With the deficit now at a very high level, many economists worry the government will begin cutting expenditures starting this fall.
Monetary policy is also a concern.
But raising interest rates this year, as the Bank of Japan has hinted might happen, could easily choke off new capital expenditures just as the private sector is ready to recover. It is imperative that very low interest rates continue. It is also possible that the increase in exports may not materialize. With inflation beginning to rise and interest rates also heading up, American economic growth will diminish. An export-led recovery would then be in doubt.