CIAO DATE: 08/03

Revitalizing the Economies of Japan and the United States

Abstract

If its consumer demand and private investment are to revive, Japan must fundamentally reform. First, it must restructure its banking system, and Japanese monetary policy must strongly support this reform. Second, Japan must also adopt a truly expansionary fiscal policy in the short run and then over time consolidate its huge public deficits and debt. Third, far-ranging deregulation and more aggressive competition policies will be needed to make Japan more competitive and economically dynamic. For the US economy, the main challenge is to maintain, or even increase, the dramatic productivity growth of the 1990s. The huge and growing US trade deficit must be corrected through increased national savings and a substantial decline in the dollar exchange rate.

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