Third, they assume that investors will not react adversely to policy backsliding. In light of the history of the 1990s, this is a dangerous assumption for policymakers. Unfortunately, the policy community is not likely to get the message until markets provide negative feedback. Should markets fail to respond soon, the policy community will be encouraged to role the clock back further, and reform will eventually cost the nation even more dearly. The government portrayed the initial budget for FY00, which was announced on Dec. 19, as one supporting GDP growth, on the grounds that public works spending remained high and bond issuance was rising.
Taxes are part of the reason for the drop.
The source of the remainder of the reduction, however, is not clear. This budget does not appear consistent with the official government GDP forecast. In short, in order to make the budget consistent with the official GDP forecast, either very large tax cuts or very large spending increases will be necessary. In light of the current state of Japanese politics, with a general election now looking more likely around September 10, the spending alternative seems far more likely. A supplementary budget with real demand support of about Y5 trillion or more is thus implicit in the contradiction between the budget figures and the official GDP forecast.