The rapid decline in capacity utilization in the face of the decelerating domestic demand is indicative in this respect. Adjusting the capital stock to lower demand growth would imply a period of weak investment demand, despite lower interest rates. The fiscal surplus in the U.S. allows policy makers to use fiscal policy in a countercyclical manner. There is room for a moderate upfront tax cut. However, it would be cautious if more ambitious tax cuts are postponed until the projected fiscal surpluses materialize.
Tax cuts imply lower public savings.
The financing of this deficit has not posed any problem so far. However, this deficit could become a destabilizing factor if foreign investors become less willing to finance it. In view of the precarious situation of public finances in Japan , there is hardly any room for further fiscal stimulus. Similarly, monetary policy has now nearly exhausted the room for relaxing financial conditions. The only remaining option for monetary easing is for the Bank of Japan to expand the range of assets it buys.