The Impact of Monetary and Tax Policy on Income Inequality in Japan

This paper assesses the effects of the most recent monetary policy behavior of the Bank of Japan (BOJ) (in particular, zero interest rate policy and negative interest rate policy) and Japanese tax policy on income inequality in this country during the period of 2002Q1 to 2017Q3. The vector error correction model that develops in this research, shows that increase in money stock (m1) through quantitative easing (QE) and quantitative and qualitative easing (QQE) policies of the BOJ significantly increases the income inequality. On the contrary, Japanese tax policy was effective in reducing the income inequality. Variance decomposition results show after ten periods almost 87.15% of the forecast error variance of the inequality is accounted for by its own innovations and 3.76% of the forecast error variance can be explained by exogenous shocks to monetary policy shock—the money stock (M1). The short-term interest rate also accounts for the increase in inequality by 0.47%. On the other hand, the total tax and real gross domestic product contributed in reducing the inequality measure, respectively, by 6.65% and 1.96% after 10 periods

Effectiveness of the Easing of Monetary Policy in the Japanese Economy, Incorporating Energy Prices

Japan has reached the limits of conventional macroeconomic policy. In order to overcome deflation and achieve sustainable economic growth, the Bank of Japan (BOJ) recently set an inflation target of 2% and implemented an aggressive monetary policy so this target could be achieved as soon as possible. Although prices started to rise after the BOJ implemented monetary easing, this may have been for other reasons, such as higher oil prices. Oil became expensive as a result of the depreciated Japanese yen and this was one of the main causes of the rise in inflation. This paper shows that quantitative easing may not have stimulated the Japanese economy either. Aggregate demand, which includes private investment, did not increase significantly in Japan with lower interest rates. Private investment displays this unconventional behavior because of uncertainty about the future and because Japan's population is aging. We believe that the remedy for Japan's economic policy is not to be found in monetary policy. The government needs to implement serious structural changes and growth strategies

Role of R&D investments and air quality in green governance efficiency

This article measures the impact of R&D investment and carbon dioxide (CO2) emission of the Shanghai and Shenzhen stock market listed companies on the green governance efficiency (G.G.E.). An econometric analysis based on the data from 2015 to 2019 is used to measure the impact. The study’s findings reveal that research and development (R&D) investments significantly boost G.G.E. On the other hand, CO2 emission and energy intensity reduce G.G.E. The study results show that the listed companies’ performance would have a significant role in achieving the Chinese government’s carbon neutrality goal. The study provides policy recommendations to promote green governance performance in China and other developing countrie

Decline in oil prices and the negative interest rate policy in Japan

In April 2013, the Bank of Japan (BOJ) introduced an inflation target of 2% with the aim of overcoming deflation and achieving sustainable economic growth. But due to lower international oil prices it was unable to achieve this target and was forced to take further measures. Hence, in February 2016, the BOJ adopted a negative interest rate policy by massively increasing the money supply through purchasing long-term Japanese government bonds (JGBs). The BOJ had previously only purchased short-term government bonds, a policy that flattened the yield curve of JGBs. On the one hand, banks reduced the number of government bonds they purchased because short-term bond yields had become negative. Even the interest rates of long-term government bonds up to 15 years became negative. On the other hand, bank loans to the corporate sector did not increase, due to the Japanese economy's vertical investment-saving (IS) curve. This paper firstly explains why, in the view of the authors, the BOJ has to reduce its 2% inflation target in the present low oil price era. Secondly, it argues that Japan cannot make a sustainable recovery from its long-lasting recession and tackle its long-standing deflation problem by means of its current monetary policy and its negative interest policy in particular. It is of key importance to make the IS curve downward rather than vertical. That means the rate of return on investment must be positive and companies must be willing to invest even if interest rates are set too low. Japan's long-term recession is due to structural problems that cannot be solved by its current monetary policy

Major challenges facing small and medium-sized enterprises in Asia and solutions for mitigating them

Small and medium-sized enterprises (SMEs) are the backbone of the Asian economy. They make up more than 98% of all Asian businesses that provide two out of three private sector jobs in the region. Therefore, it is vitally important for Asia's economic success to have fully functioning support measures for SMEs. However, SMEs face challenges from limited access to finance, lack of databases, low R&D expenditures, undeveloped sales channels, and low levels of financial inclusion, which are some of the reasons behind the slow growth of SMEs. This paper focuses on four major reasons that slowed the SME growth in Asia including i) lack of finance, ii) lack of comprehensive databases, iii) low level of R&D expenditures, and iv) insufficient use of information technology and provides remedies for mitigating them

Optimal credit guarantee ratio for Asia

Difficulty in accessing finance is one of the critical factors constraining the development of small and medium-sized enterprises (SMEs) in Asia. Owing to their significance to national economies, it is important to find ways to provide SMEs with stable finance. One efficient way to promote SME financing is through credit guarantee schemes, where the government guarantees a portion (ratio) of a loan provided by a bank to an SME. This research provides a theoretical model and an empirical analysis of factors that determine optimal credit guarantee ratio. The ratio should be able to fulfill the government's goal of minimizing the bank's nonperforming loans to SMEs, and at the same time fulfill the government policies for supporting SMEs. Our results show that three categories of factors can determine the optimal credit guarantee ratio: (i) government policy, (ii) macroeconomic conditions, and (iii) banking behavior. It is crucial for governments to set the optimal credit guarantee ratio based on macroeconomic conditions and vary it for each bank or each group of banks based on their soundness, in order to avoid moral hazard and ensure the stability of lending to SMEs

Three Arrows of 'Abenomics' and the Structural Reform of Japan: Inflation Targeting Policy of the Central Bank, Fiscal Consolidation, and Growth Strategy

"Abenomics" refers to the economic policies advocated by Prime Minister Shinzo Abe who became prime minister of Japan for a second time when his party, the Liberal Democratic Party, won an overwhelming majority at the general election in December 2012. Abenomics has "three arrows": (i) aggressive monetary policy, (ii) fiscal consolidation, and (iii) growth strategy. The Japanese economy faces an aging population and expanding social welfare expenses. No other country has experienced Japan's rapid growth of retired people. In this paper we will explain these three aspects of Abenomics and the current state of the Japanese economy, and examine what further remedies may be required if Japan is to recover from its long-term deflation. We look at such proposals as hometown investment trust funds and postponing of the retirement age through the introduction of a flexible wage rate system

Optimal fiscal policy rule for achieving fiscal sustainability: A Japanese case study

Japan's debt-to-gross domestic product (GDP) ratio is the highest among Organisation for Economic Co-operation and Development (OECD) countries. This paper will firstly answer the question of whether Japanese government debt is sustainable. Next, while the Domar condition and Bohn's condition are often used in the literature to check whether a government's debt situation is in a dangerous zone, this paper will show that the Domar condition is obtained only from the government budget constraint (namely the supply of government bonds) and does not take into account the demand for government bonds. A simple comparison of the interest rate and the growth rate of an economy using the Domar condition is not adequate to check the stability of a government's budget deficit. Both the interest rate and the growth rate of the economy are determined endogenously in the model. Thirdly, this paper shows that Bohn's condition satisfies the stability of the government budget in the long run by imposing constraints on the primary balance. However, Bohn's condition does not achieve economic stability - even if the condition is satisfied, the recovery of the economy may not be achieved. This paper will propose a new condition that satisfies both the stability of the government budget and the recovery of the economy. The paper will shed light on these issues both theoretically and empirically. The empirical findings declare that in order to achieve fiscal sustainability based on the optimal fiscal policy rule provided in this paper, both sides of the Japanese government budget (expenditure and revenue) need to be adjusted simultaneously. Moreover, the results show that the decrease in government expenditure has to be to more than the increase in tax revenue

Impact of Fukushima nuclear disaster on oil-consuming sectors of Japan

The Fukushima Daiichi nuclear disaster was an accident at the Fukushima I Nuclear Power Plant in Fukushima, Japan, which resulted primarily from the tsunami following the Tohoku earthquake on 11 March 2011, and which led to year-long nuclear shutdown in the country. During the shutdown, Japan substituted fossil fuels for nuclear power and became more dependent on import and consumption of fossil fuels including oil, gas, and coal. In this paper, we try to shed light on the elasticity of oil consumption to crude oil price before and after the Fukushima disaster in Japan's various economic sectors. To do so, we apply a cointegration analysis and perform a vector error correction (VEC) variance decomposition by using quarterly data in two separate subperiods from Q1 1981 to Q4 2010 and from Q1 2011 to Q4 2015. Our findings reveal that the absolute value of elasticities of oil consumption by some economic sectors, such as the industry, non-energy, and transportation sectors to oil prices, has reduced after the disaster because of increased dependency on oil consumption, which endangered energy security in the country. To raise energy self-dependency and energy security, Japan needs to diversify its energy supply resources. For instance, the share of renewable energy in Japan's energy basket needs to increase. Because renewable energy projects are mainly considered risky and banks are reluctant to finance them, we introduce an innovative form of financing these projects: Hometown Investment Trust Funds, which has been introduced and applied in Japan and other parts of Asia

The Response of Macro Variables of Emerging and Developed Oil Importers to Oil Price Movements

This paper assesses the impact of crude oil price movements on two macro variables - the gross domestic product (GDP) growth rate and consumer price index inflation rate - in the developed economies of the United States and Japan, and an emerging economy, the People's Republic of China (PRC). These countries were chosen for this research because they are the world's three largest oil consumers. The main objective of this study is to see whether these economies are still reactive to oil price movements. The results obtained suggest that the impact of oil price fluctuations on the GDP growth of the developed oil importers is much lower than on the GDP growth of the emerging economy. The main reasons for this lie in fuel substitution (higher use of nuclear energy, gas, and renewables), a declining population (for Japan), the shale gas revolution (for the United States), and strategic oil stocks and government-mandated energy efficiency targets in developed economies. All of these factors make developed economies more resistant to oil shocks. On the other hand, the impact of oil price movements on the PRC's inflation rate was found to be milder than in the two developed countries that were examined. The main cause for this is that the PRC experiences a larger forward shift in its aggregate supply due to higher growth, which allows it to avoid a massive increase in price levels following oil price shocks