What story do we get from all of this data? Well, we get a picture of a country that used to grow very fast, but now he's having real trouble with growth. We saw how it's one of the slowest growing countries in the world in the 21st century. We see a country that has experienced deflation which can be a problem, because if you expect prices to fall this can be a self-fulfilling prophecy. I wait for prices to go down in order to buy. If I expect them to go down, they may go down and at the same time, I may delay consumption. So, actually deflation can slow down growth and it can cause other problems that we're going to talk about in just a minute. So, the question I want to ask ourselves as we move forward to read the Japanese data is, why are they not growing very much and how could they get back to growth? Now the first part of that question, why are they not growing so much, we're going to answer that piece by piece. But maybe we should ask ourselves, why do we need to grow? Why does the country need to grow? Is there any particular reason? Well, growth is nice because it helps people to come out of poverty. It helps one generation to live better than the previous, which makes people feel better about themselves, about their work. But also growth is helpful because if I have a debt and I'm growing, the debt becomes easier to pay. If I think about my debt maybe being 100 and I divide it by my income to see how important that debt is to me. Say my income is also 100. So, I've got a debt of 100 in income of 100, that's my debt burden. Well, imagine that nothing happens to the debt but my income shrinks. What might happen then, what will happen is that the burden of that debt for me becomes more. It becomes harder to repay because I now I'm paying it out of a smaller income. So, this is another reason that countries want to grow. Because debts need to be repaid and it's easier to repay them with growth. It's easier to repay them with inflation. Deflation which shrinks the denominator, shrinks income, also makes debt harder to repay for corporations, for households, for governments. So, there are reasons that Japan would like to grow. So, one of the stories of Japan in the 21st century has been the country trying to get back to growth. And I'd like to explore with you different ways the country might get back to growth, solve its problem of stagnation, deflation, and get back to growth which would fulfill a lot of different objectives at the same time. The first attempt that we're going to explore to bring the country back to growth is fiscal policy. As you know, we can use fiscal policy to try to accelerate GDP growth or to try to slow it down. Obviously in the Japanese case, we would need to use fiscal policy to accelerate growth in the country, to try to get it to grow somewhat faster. So, here on this slide, you can see government spending and revenues as a percent of GDP. Just like we did with the United States. And you can see that the government looks like it was trying to use government spending to stimulate the economy, because the country is running a consistent deficit, as consistent as the one we saw in the United States except, usually a little bit larger which is the distance between the spending line and the revenue line that you see on these chart. In fact, this deficit again, measured as a percent of GDP which is the way we should measure it, has been chronic in Japan for a long time. You can see on this chart where we're going, much further back, back into the 20th century, we can see that they've had a deficit many years. In fact, there's only one surplus on this chart, which would be appropriate if those were years of recessionary gap in the government were using that extra government spending to try to stimulate the economy and bring it back to growth. So, let's explore that. Let's see whether there is a deficit in a recessionary gap and a surplus in an inflationary gap just like we were looking for in the United States and did not find in our last session. Here on this slide, you've got the output gap and I've labeled for you recessionary gap, inflationary gap, recessionary gap, and inflationary gap at the end. So, you can see when the economy was operating, was growing too fast, an inflationary gap, when it was growing too slow, a recessionary gap. And then the line below, it is the deficit. And you see an interesting picture here somewhat similar to the United States but even more exaggerated. Where the budget never balances. It doesn't balance when the economy goes into that short inflationary gap just before the global financial crisis 2006, 2007. It doesn't balance when the economy goes into that inflationary gap in recent years. And it's a very deep deficit in the middle. So, it does look like the government is trying to use government spending to get the economy to grow, but it's using it any inflationary gaps as well as recessionary gaps.
