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Japanese expansionary fiscal policy Essay


Since the fall of the Soviet Union, capitalism has been the most dominant form of economy in the world. With the exception of China and Cuba, few socialist economies survive in the world today. Japan, along with the United States, has some of the oldest capitalist economies in the world.

One of the most significant features of the market economy is the cycles that characterize it. Perhaps, the most severe of these cycles is depression which last occurred in 1933. However, recession is devastating as well, and it disrupts many economic processes including credit flow. Both the US and Japan have gone through these cycles and offer a good studying point on the same. While China dethroned Japan as the world’s second largest economy, Japan still presents a model case for world economists in studying its economic cycles.

This discussion will focus on the “scrap and build” strategy that Japan employed early on its economic development especially in industrial development. Additionally, the discussion will take a look at the balance sheet recession that some scholars argue Japan has undergone since the bubble bust in 1989.

Scrap and Build Strategy

There has been an argument by Burkett and Hart-Landsberg that, since the end of the occupation in 1952, Japan, under the guidance of the Ministry of International Trade and Industry (MITI), practiced a strategy of ‘scrap and build,” which eventually ran out of steam by the end of the 1980’s. Scrap and build strategy mainly focused on the postwar accumulation of assets and industrial restructuring in Japan with the primary aim of restoring the Japanese economy, mainly through exports (Rob 5).

Before the oil crisis in 1973, Japan had run down light industries which in the prewar period ensured the country generated a surplus for a number of years. The government used this surplus to offer subsidies to heavy industries whose growth will later fuel Japanese capitalism.

“Scrap and build”essentially derived its meaning from the Japanese government policy which emphasized on building heavy industry for chemicals and basic materials for processing imported raw materials while exporting iron, steel, ships and petroleum products (Rob 6). On the other hand, the policy advocated for the scraping of coal mining and agriculture as well as textiles.

According to Rob, it is important to note that the scrap and build process involved many socio-political processes that eventually led to its decline (9). Rob adds that the scrap and build process demanded high-level political organization and a social structure that could accommodate the dislocations that the process brought (9).

Most observers essentially agree that the scrap and build process was somehow a causality of the cold war and the resultant socio-political consequences that had a negative ripple effect on the entire system. Rob precisely says that the breakdown of the scrap and build process was as a result of the socialist elements in the Japanese system who prioritized development of the welfare state at the expense of market efficiency (10).

An objective audit of the entire process will reveal however, a gradual loss of control of the working class by the bourgeois which in effect reduced the effectiveness of labor relations resulting in the decline of the process.

Bailey on the other hand argues that the decline of the scrap and build process was as a result of years of cumulative dynamic capitalism ways that were beyond the control of Japan’s economic managers (192). It is not easy to tell if the scrap and build process in Japan would have survived beyond the 1980’s.

However, loss of steam was more or less likely because of economic cycles that ensured that the process peaked at the time. Nonetheless, it is safe to conclude that despite its loss of steam in the 80’s, the process was strong enough to power Japan to greater economic prosperity in the long run.

Japan’s balance sheet recession

The world economic crisis in 2008 reverberated across the world perhaps because many countries anchor their economies with that of the United States. Currently, the US economy is recovering but, another important economic zone, the Eurozone is undergoing one of its worst economic crises. These situations are comparable to the Japan balance sheet recession and the deleveraging cycles that Japan’s private sector had to go through twenty years ago due to the asset bubble in equities and real estate.

According to Weinstein, both the government and the private sector of Japan responded to the crisis by adopting an expansionist approach to fiscal policy (45). The private sector stated paying big debts, improving by atleast 6% of the gross domestic product. Household savings stood at 4% per year on the backdrop of 0% interest rates (Weinstein 50).

The government of Japan’s expansionary fiscal policy was however the most significant. The government borrowed heavily and spent approximately $100 to maintain the economy’s expenditure at $1000 (Weinstein 50). Though the balance sheet recession led to a massive loss of wealth, Japan was able to avoid loss of GDP by rates lower than the pre-crisis levels. The expansionary policy by government helped maintain incomes in the private sector as well as in the households in such a way that economic entities were able to pay back debt.

Objective analysis of the situation will conclude that the Japanese government’s fiscal expansion policies helped stem crowding out, rise in inflation and interest rates especially on the face of a deleveraging private sector.

Further, most economists agree that the expansionist fiscal policy that the government undertook helped in shelving the fall of money supply in the Japanese economy mainly because government borrowing from the private sector mitigated severe contraction of Japanese bank assets. Concisely, the expansionary fiscal policy that the Japanese government took was helpful in ensuring that the GDP as well as money supply did not contract on the face of considerable deleveraging by the private sector players.


In a balance sheet recession situation, the economy tends to be in a free fall. However, the actions by the Japanese government helped stem a complete collapse of the economy through a fiscal expansion policy.

It is correct to assert that if the Japanese government lacked action i.e. expansionary fiscal policy, economic agents in the Japanese economy would have shifted massively from borrowing to savings effectively strangling credit flow. The result will be private sector deleveraging which could only be offset by increased government borrowing.

One of the widely accepted notions in the market economy is the role of investor psychology. The perception of economic agents on the health of the economy is important in making decisions. Hence, the perception that the government is taking remedial measures concerning the economy is always crucial in sorting out an economic mess such as the Japanese balance sheet recession.

Works Cited

Bailey, David. Crisis Or Recovery in Japan: State and Industrial Economy, New York: Sage Publications, 2007. Print.

Steven, Rob. Japan’s new imperialism, New York: Routledge, 1990. Print.

Weinstein, David. Japan’s Bubble, Deflation, and Long-Term Stagnation, Cambridge: Cambridge University Press, 2011. Print.

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IvyPanda. 2019. "Japanese expansionary fiscal policy." December 11, 2019. https://ivypanda.com/essays/japanese-expansionary-fiscal-policy/.


IvyPanda. (2019) 'Japanese expansionary fiscal policy'. 11 December.

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