Lijian SUN, Director of the Financial Research Center at Fudan Development Institute and Professor at the School of Economics, Fudan University, believes that the Sanae TAKAICHI administration's attempt to simultaneously achieve fiscal expansion, reduce massive debt, and stabilize the Japanese yen constitutes an economic impossible trinity, representing a high-risk economic gamble. Its responsible and active fiscal policy is a radical upgrade of Abenomics. Although there is political necessity for stable growth, Japan's debt-to-GDP ratio ranks highest among developed economies, and with soaring interest payment costs, the source of funding for expansionary policies becomes a core challenge. Using foreign exchange reserve surpluses to fill fiscal gaps is even more like drinking poison to quench thirst, severely undermining the yen's credibility and triggering capital outflows. The combination of the TAKAICHI administration's loose fiscal policy + slow interest rate hikes, coupled with the US-Japan interest rate differential, continues to put downward pressure on the yen. Although imported inflation forces rate hikes and authorities' forex intervention creates a counterbalance, the yen is still struggling to find its bottom in a tug-of-war between market short-selling and central bank intervention. Meanwhile, the goal of reducing the debt-to-GDP ratio, hindered by Japan's aging population and sluggish growth, requires a perfect synergy of above-expectation GDP growth, fiscal reform, and monetary policy coordination. Inefficient use of funds would only exacerbate economic difficulties. The true way out for the Japanese economy is to step outside the triangular framework and advance supply-side structural reforms. By reforming the labor market, incentivizing technological innovation, and optimizing fiscal social security to enhance total factor productivity, Japan can achieve high-quality growth. Its policy practices also offer important lessons for other aging and debt-burdened economies of a similar nature.

Translated by Yiqian YANG

Full text in Chinese available at:

https://fddi.fudan.edu.cn/be/69/c18965a769641/page.htm