In Japan, domestic demand has not fully recovered since the consumption tax was increased in March 2014, and contracted further in the second quarter of 2015. Private consumption is still below its end-2013 level. In this environment, strict adherence to deficit-reduction targets could result in prematurely aggressive fiscal consolidation and threaten Japan’s economic recovery and escape from deflation. Recalibrating fiscal policy to support economic growth and minimize fiscal drag would help avoid overburdening monetary policy and reliance on yen depreciation to support externally-driven growth. Over the medium-term, ambitious structural reforms facilitated by the Trans-Pacific Partnership, including in the agricultural and services sectors, are needed to raise productivity and boost potential … Continue reading U.S. Department of the Treasury