David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 17 Fiscal policy and foreign trade
0 Japan's macroeconomic misery
The table below illustrates Japan's economic misery during this period.
Annual GDP Interest Budget deficit Government net
growth (%) rate (%) (% of GDP) debt (% of GDP)
1993 0 3 2 18
1 994-95 1.5 1.5 3 23
1996 5 I l 4 29
1997-99 -1 l 5 45
2000-02
I
1.5 0 6 66
2003-07 2 0 6 82
2008-09 -3.3 0 6 90
Source: OECD.
Lessons for Western economies
The Japanese example contains three important lessons. First, when confidence collapses, even fiscal policy
may not be able to boost aggregate demand. This means that governments should do all they can to prevent
confidence ever collapsing to this extent. In retrospect, Western banks were too loosely regulated and
governments had failed to discharge their responsibility to create a stable financial environment in the years
leading up to 2008.
Second, cleaning up the banks must be an important priority. The Japanese government's unwillingness to
lose face by admitting the extent of the problem meant that suspicion and lack of confidence persisted longer
RBS share price, 2008-10
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