There have several argument have been proposed over the years about why fiscal policy was ineffective in Japan economy. There are few argument point out that the simple first-round positive effects of fiscal policy maybe be negated by the negative effect completely that show from the need of the government to cause the money in order to fund the fiscal expenditure.
(1)Interest Rate-Based Crowding Out
This is based on a Keynesian relationship between investment and interest rates ,it argues that crowding out of fiscal expenditure may occur via higher interest rates. This proposition of fiscal policy ineffectiveness is in line with classical theory, which
argued that government expenditure would result in an equal reduction in private
demand, via an increase in real interest rates. The crowding out effect of increasing the
government expenditure through higher interest rates is reflected in the IS-LM synthesis, standard Keynesian models and the mainstream monetarist models. There is no empirical evidence in their support. Some economists argued that during the first half of the 1990s, it increased bond issuance to fund fiscal spending would push up the long term interest rates and lower the bond price.
Despite brief periods of rising long-term nominal rates, nominal short-term and long-term interest rates have decline during the 1990s. There are only two instances where they rose: from 4.3% in 1993 to 4.4% in 1994, and from 1.3% in 1998 to 1.8% in 1999. However, in both cases rates subsequently resumed their decline to new lows. Also, we find that short-term real interest rates decrease from 4.2%in 1991 to 0.11% in 2000, while the long-term real interest decline from 3.0% in 1991 to 0.7% in 1998, but in 2000, it rises to 2.5% on average. These real rates were lower than during the 1980s. These facts contradict interest rate crowding out argument
This is based on a reduction in consumption and an increase in savings that affect by increasing fiscal spending. This show that consumers will believe that any fiscal spending funded by the issuance of government debt will require the debt to be fully paid off in the relevant future by raising taxes on individuals. Then for every yen in government spending, rational consumers would increase savings by one yen because they are preparing the money to repay the government in the future.(责任编辑：BUG)