Volume 4(2016)

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The Case for an Independent Fiscal Institution in Japan
George Kopits1

ABSTRACT

In response to the recent financial crisis and the ensuing buildup in public indebtedness, an increasing number of advanced economies have created independent fiscal institutions (IFIs) to improve the quality of public finances and to strengthen the credibility of government policy. A review of Japan’s fiscal policymaking over the past decades suggests that Japan would greatly benefit from establishing an IFI in line with internationally accepted standards of good practice. Such an institution could help correct critical weaknesses in policymaking and anchor expectations, especially if introduced as part of a fiscal framework with a medium-term perspective.

I. INTRODUCTION

In recent years, a new generation of independent fiscal institutions (IFIs) has proliferated in advanced economies, as well as in some emerging market economies, partly in response to the financial crisis and the ensuing buildup in public indebtedness, unprecedented in peacetime history. In general terms, the rationale for IFIs stems from the quest for transparency in public finances, and thereby, for improving fiscal policymaking.

The purpose of this article is to examine the case for establishing an IFI for Japan, given past trends, current conditions, and future outlook. To this end, the rationale, experience and effectiveness of existing IFIs are reviewed, to assess their potential relevance for Japan. In addition, drawing on international good practice, the article explores the features of such an institution which would be most suitable to address Japan’s public finances.

The article is organized as follows. Section II outlines the distinguishing features, rationale, and effectiveness of IFIs. Section III highlights major trends and characteristics of Japan’s fiscal policy over the past two decades. Section IV provides a panoramic overview of IFIs in advanced economies, distilling lessons of relevance for Japan. Section V suggests design options for consideration in establishing an IFI in Japan. Section VI concludes.

1. The author is a senior scholar at the Woodrow Wilson Center and member of the Portuguese Public Finance Council. This article was prepared while he was an IMF visiting scholar. A preliminary version was presented at an ADBI Distinguished Speaker Seminar, in Tokyo, December 11, 2015. Comments by T. Kitamura, H. Tanaka, H. Ueno, M. Ueno, N. Yoshino and other seminar participants are gratefully acknowledged. The paper has benefited from useful inputs from E. Arbatli, L. Everaert, and I. Saito. The views expressed are those of the author and do not necessarily represent the views of the IMF, its Executive Board, or its management.