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Happy News from the Dismal Science: Reassessing the Japanese Fiscal Policy and Sustainability

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  • Christian Broda
  • David E. Weinstein

Abstract

We analyze fiscal policy and fiscal sustainability in Japan using a variant of the methodology developed in Blanchard (1990). We find that Japan can achieve fiscal sustainability over a 100-year horizon with relatively small changes in the tax-to-GDP ratio. Our analysis differs from more pessimistic analyses in several dimensions. First, since Japanese net debt is only half that of gross debt, we demonstrate that the current debt burden is much lower than is typically reported. This means that monetization of the debt will have little impact on Japan's fiscal sustainability because Japan's problem is the level of future liabilities not current ones. Second, we argue that one obtains very different projections of social security burdens based on the standard assumption that Japan's population is on a trend towards extinction rather than transitioning to a new lower level. Third, we demonstrate that some modest cost containment of the growth rate of real per capita benefits, such as cutting expenditures for shrinking demographic categories, can dramatically lower the necessary tax burden. In sum, no scenario involves Japanese taxes rising above those in Europe today and many result in tax-to-GDP ratios comparable to those in the United States.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10988.

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Date of creation: Dec 2004
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Handle: RePEc:nbr:nberwo:10988

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  1. Kuttner, Kenneth N. & Posen, Adam S., 2002. "Fiscal Policy Effectiveness in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 16(4), pages 536-558, December.
  2. Mitsuhiro Fukao, 2003. "Financial strains and the zero lower bound: the Japanese experience," BIS Working Papers 141, Bank for International Settlements.
  3. Takero Doi & Takeo Hoshi, 2002. "Paying for the FILP," NBER Working Papers 9385, National Bureau of Economic Research, Inc.
    • Takero Doi & Takeo Hoshi, 2003. "Paying for the FILP," NBER Chapters, in: Structural Impediments to Growth in Japan, pages 37-70 National Bureau of Economic Research, Inc.
  4. Kotlikoff, L.J. & Raffelhuschen, B., 1999. "Generational Accounting around the Globe," Norway; Department of Economics, University of Bergen, Department of Economics, University of Bergen 195, Department of Economics, University of Bergen.
  5. Kenneth N. Kuttner & Adam S. Posen, 2001. "The Great Recession: Lessons for Macroeconomic Policy from Japan," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 93-186.
  6. Yukinobu Kitamura & Noriyuki Takayama, 1999. "Lessons from Generational Accounting in Japan," American Economic Review, American Economic Association, American Economic Association, vol. 89(2), pages 171-175, May.
  7. Thai-Thanh Dang & Pablo Antolín & Howard Oxley, 2001. "Fiscal Implications of Ageing: Projections of Age-Related Spending," OECD Economics Department Working Papers 305, OECD Publishing.
  8. Martin Mühleisen & Hamid Faruqee, 2001. "Population Aging in Japan," IMF Working Papers 01/40, International Monetary Fund.
  9. Faruqee, Hamid & Muhleisen, Martin, 2003. "Population aging in Japan: demographic shock and fiscal sustainability," Japan and the World Economy, Elsevier, Elsevier, vol. 15(2), pages 185-210, April.
  10. Noriyuki Takayama & Yukinobu Kitamura & Hiroshi Yoshida, 1999. "Generational Accounting in Japan," NBER Chapters, in: Generational Accounting around the World, pages 447-470 National Bureau of Economic Research, Inc.
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Cited by:
  1. Botman, Dennis & Edison, Hali & N'Diaye, Papa, 2009. "Strategies for fiscal consolidation in Japan," Japan and the World Economy, Elsevier, Elsevier, vol. 21(2), pages 151-160, March.
  2. Gary Saxonhouse & Robert Stern, 2005. "Reversal of fortune: Macroeconomic policy, International Finance, and Banking in Japan," International Economics and Economic Policy, Springer, Springer, vol. 2(2), pages 91-100, November.
  3. Toshihiro Ihori & Ryuta Ray Kato & Masumi Kawade & Shun-ichiro Bessho, 2011. "Health Insurance Reform and Economic Growth: Simulation Analysis in Japan," Working Papers, Research Institute, International University of Japan EMS_2011_17, Research Institute, International University of Japan.
  4. Toshihiro Ihori & Ryuta Ray Kato & Masumi Kawade & Shun-ichiro Bessho, 2006. "Public Debt and Economic Growth in an Aging Japan," Working Papers, Research Institute, International University of Japan EMS_2006_11, Research Institute, International University of Japan.
  5. Eduardo Levy Yeyati and Federico Sturzenegger, 2007. "A Balance-Sheet Approach to Fiscal Sustainability," Business School Working Papers, Universidad Torcuato Di Tella balancesheet, Universidad Torcuato Di Tella.
  6. Laurence Ball, 2005. "Fiscal Remedies for Japan's Slump," NBER Working Papers 11374, National Bureau of Economic Research, Inc.
  7. James Harrigan & Kenneth Kuttner, 2004. "Lost Decade in Translation: Did the US Learn from Japan's Post-Bubble Mistakes?," NBER Working Papers 10938, National Bureau of Economic Research, Inc.
  8. Mitsuru Iwamura & Takeshi Kudo & Tsutomu Watanabe, 2005. "Monetary and Fiscal Policy in a Liquidity Trap: The Japanese Experience 1999-2004," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 05009, Research Institute of Economy, Trade and Industry (RIETI).
  9. Mitsuru Iwamura & Takeshi Kudo & Tsutomu Watanabe, 2005. "Monetary and fiscal policy in a liquidity trap: the Japanese experience 1999-2004," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  10. Toshihiro Ihori, 2006. "Fiscal policy and fiscal reconstruction in Japan," International Tax and Public Finance, Springer, Springer, vol. 13(4), pages 489-508, August.
  11. Sinha, Pankaj & Arora, Varun & Bansal, Vishakha, 2011. "Determinants of Public Debt for middle income and high income group countries using Panel Data regression," MPRA Paper 32079, University Library of Munich, Germany.
  12. Yasuharu Iwata, 2011. "The Government Spending Multiplier and Fiscal Financing: Insights from Japan," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 14(2), pages 231-264, 06.
  13. Mitsuru Iwamara & Takeshi Kudo & Tsutomu Watanabe, 2005. "Monetary and Fiscal Policy in a Liquidity Trap: The Japanese Experience 1999-2004," NBER Working Papers 11151, National Bureau of Economic Research, Inc.

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