Fiscal credibility starting to unravel

Hopes that yet more fiscal stimulus will transform the prospects for Japan’s economy, or at least make a meaningful difference to GDP in the next year or so, are overdone. The government’s credibility on this issue is already being undermined by mixed signals on the needs for fiscal stimulus and for fiscal discipline and by uncertainty over the planned consumption tax hikes. And to the extent that fiscal stimulus does work, it may actually weaken the case for additional policy easing from the Bank of Japan.