In the past 8 months, Japan’s Prime Minister Taro Aso and the LDP have put together three stimulus (spending) packages totaling more than 5% of GDP.
This new 25 trillion yen is on top of the multi-trillion yen worth ($6.3 trillion) of spending Japan’s government went through between 1991 and last fall.
What will come of it? Here is one result of the previous spending:
Or as explained by the graph’s authors:
By weakening the private economy, government borrowing is not an inflationary threat. Much light on this matter can be shed by examining Japan from 1988 to the 2008 and the U.S. from 1929 to 1941. In the case of Japan government debt to GDP ratio surged from 50% to almost 170%. So, if large increases in government debt were the key to economic prosperity, Japan would be in the greatest boom of all time. Instead, their economy is in shambles. After two decades of repeated disappointments, Japan is in the midst of its worst recession since the end of World War II. In the fourth quarter, their GDP declined almost twice as fast as that of the U.S. or the EU. The huge increase in Japanese government debt was created when it provided funds to salvage failing banks, insurance and other companies, plus transitory tax relief and make-work projects.
In 2008, after two decades of massive debt increases, the Nikkei 225 average was 77% lower than in 1989, and the yield on long Japanese Government Bonds was less than 1.5% (Chart 6). As the Government Debt to GDP ratio surged, interest rates and stock prices fell, reflecting the negative consequences of the transfer of financial resources from the private to the public sector (Chart 7). Thus, the fiscal largesse did not restore Japan to prosperity. The deprivation of private sector funds suggested that these policy actions served to impede, rather than facilitate, economic activity.
See also: Japan from the CEE
Japanese taxpayers still haven’t spent enough
The Japanese just didn’t try hard enough
Explaining Japan’s Recession
What Happened to Japan?
Japan’s Bust: An Austrian Critique of the Fed’s Explanation