The unsung success of Japan's recent fiscal policy By Scott Sumner

The media tends to dwell on bad news. Even when something is a smashing success, say Germany’s 2004 labor market reforms, the reporting is relentlessly downbeat. The same is true of Japan’s recent fiscal policy, which has finally brought the national debt under control. The debt to GDP ratio has leveled off at roughly 240% of GDP since the 2014 tax increase:

Better yet, this fiscal austerity was associated with an extremely strong labor market, not at all the “disaster” predicted by Keynesian economists:

But that doesn’t stop the media from continuing to insist that the fiscal austerity was a failure. Here’s the Financial Times, discussing the planned October increase in Japan’s national sales tax, from 8% to 10%:

After the disastrous economic impact in 2014, when the tax went up from 5 to 8 per cent, the government has prepared a series of countermeasures.

“Disastrous”? But at least the FT is hedging its bets this time around, as the article is entitled:

Fears recede of Japan recession sparked by consumption tax rise

I’ve been repeatedly insisting that those fears were groundless. That’s not to say a recession cannot occur at some point, but it wouldn’t be caused by fiscal austerity.

The actual policy disaster occurred in 2008, when the Bank of Japan’s tight money policy led to a sharp fall in NGDP. Fiscal policy (and also severe real shocks like the 2011 tsunami) don’t have much impact on employment.