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Fiscal sustainability in Japan: What to tackle?

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  • İmrohoroğlu, Selahattin
  • Kitao, Sagiri
  • Yamada, Tomoaki
Abstract
Japan leads advanced economies in terms of the speed and magnitude of demographic aging and has the highest debt to GDP ratio. Furthermore, public pension, medical and long-term care (LTC) expenditures are projected to far outpace revenues and create even more severe fiscal burdens. In this paper, we develop an accounting model populated with overlapping generations of individuals and incorporate social insurance programs in detail, use most recent estimates of Japanese micro data and government demographic projections to discipline the earnings and labor supply profiles of heterogeneous agents and their cohort shares, and simulate future paths of fiscal and macroeconomic indicators. Our numerical results suggest that absent any change in current policies, Japan will continue to run large pension, public health, LTC, and basic deficits and the debt to GDP ratio will continue to reach unprecedented highs, with growing interest payments. Although no single policy tool can address fiscal consolidation, a combination of policies is found to achieve sustainability: raise the retirement age to 67, cut pensions by 10%, raise copays of health and LTC insurances to at least 20% for all, and find policies to propel female employment and earnings and to narrow the gap with their male counterparts, and increase consumption tax rate to 15%. Under these changes, the debt to output ratio in 2050 would be lower than that in 2020.

Suggested Citation

  • İmrohoroğlu, Selahattin & Kitao, Sagiri & Yamada, Tomoaki, 2019. "Fiscal sustainability in Japan: What to tackle?," The Journal of the Economics of Ageing, Elsevier, vol. 14(C).
    • Handle: RePEc:eee:joecag:v:14:y:2019:i:c:s2212828x19300921
    DOI: 10.1016/j.jeoa.2019.100205
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    1. Imrohoroglu, Selahattin & Sudo, Nao, 2011. "Will a Growth Miracle Reduce Debt in Japan?," Economic Review, Hitotsubashi University, vol. 62(1), pages 44-56, January.
    2. Jin Song & Terry Sicular & Bjorn Gustafsson, 2017. "China's Urban Gender Wage Gap: A New Direction?," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 201723, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
    3. Selahattin Imrohoroglu & Nao Sudo, 2011. "Productivity and Fiscal Policy in Japan: Short-Term Forecasts from the Standard Growth Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 29, pages 73-106, November.
    4. Gary Hansen & Selahattin Imrohoroglu, 2016. "Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 201-224, July.
    5. Doi, Takero & Hoshi, Takeo & Okimoto, Tatsuyoshi, 2011. "Japanese government debt and sustainability of fiscal policy," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 414-433.
    6. Kjetil Storesletten, 2003. "Fiscal Implications of Immigration—A Net Present Value Calculation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 487-506, September.
    7. Selahattin İmrohoroğlu & Sagiri Kitao & Tomoaki Yamada, 2017. "Can Guest Workers Solve Japan'S Fiscal Problems?," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1287-1307, July.
    8. Mark Aguiar & Erik Hurst, 2013. "Deconstructing Life Cycle Expenditure," Journal of Political Economy, University of Chicago Press, vol. 121(3), pages 437-492.
    9. Kitao, Sagiri, 2015. "Fiscal cost of demographic transition in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 37-58.
    10. Jeremy Lise & Nao Sudo & Michio Suzuki & Ken Yamada & Tomoaki Yamada, 2014. "Wage, Income and Consumption Inequality in Japan, 1981-2008: from Boom to Lost Decades," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 582-612, October.
    11. Takeo Hoshi & Takatoshi Ito, 2014. "Defying gravity: can Japanese sovereign debt continue to increase without a crisis? [Fiscal discipline and the cost of public debt service: some estimates for OECD countries]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 29(77), pages 5-44.
    12. Selahattin İmrohoroğlu & Sagiri Kitao & Tomoaki Yamada, 2016. "Achieving Fiscal Balance In Japan," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 117-154, February.
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    Cited by:

    1. Makoto Saito, 2021. "Public Bonds as Money Substitutes at Near-Zero Interest Rates: Disequilibrium Analysis of the Current and Future Japanese Economy," Advances in Japanese Business and Economics, in: Strong Money Demand in Financing War and Peace, pages 79-119, Springer.
    2. Kitao, Sagiri & Mikoshiba, Minamo, 2020. "Females, the elderly, and also males: Demographic aging and macroeconomy in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).
    3. Kikuchi, Shinnosuke & Kitao, Sagiri & Mikoshiba, Minamo, 2021. "Who suffers from the COVID-19 shocks? Labor market heterogeneity and welfare consequences in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 59(C).
    4. Shinnosuke Kikuchi & Sagiri Kitao & Minamo Mikoshiba, 2020. "Who Suffers from the COVID-19 Shocks? Labor Market Heterogeneity and Welfare Consequences in Japan (Forthcoming in the Journal of the Japanese and the International Economies)," CARF F-Series CARF-F-490, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    5. Kato, Ryuta Ray, 2022. "Population aging and labor mobility in Japan," Japan and the World Economy, Elsevier, vol. 62(C).
    6. Saito, Makoto & 齊藤, 誠, 2020. "Long-run mild deflation under fiscal unsustainability in Japan," Discussion Paper Series 703, Institute of Economic Research, Hitotsubashi University.
    7. Chen, Fengming & Wakabayashi, Midori & Yuda, Michio, 2024. "The impact of retirement on health: Empirical evidence from the change in public pensionable age in Japan," The Journal of the Economics of Ageing, Elsevier, vol. 28(C).

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    More about this item

    Keywords

    Fiscal balance; Social security; Medical expenditures; Health insurance; Long-term care insurance; Demographic aging; Japanese economy; Female labor force participation; Overlapping generations;
    All these keywords.

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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