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Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach

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  • MASAYA SAKURAGAWA
  • KAORU HOSONO

Abstract

The purpose of this paper is to investigate the fiscal sustainability of Japan by applying a dynamic stochastic general equilibrium model to the Japanese economy. By introducing intermediation costs into the model, we succeed in explaining the observed relationship between the interest and GDP growth rates, which is crucial in testing for sustainability. When the projected real growth rate is 2.5%, the average real interest rate becomes 2.57%, and the debt-to‐GDP ratio gradually increases stochastically so that government debt is not sustainable. To recover sustainability, the primary surplus must be 0.2% of GDP.

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  • Masaya Sakuragawa & Kaoru Hosono, 2010. "Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 517-537, December.
    • Handle: RePEc:bla:jecrev:v:61:y:2010:i:4:p:517-537
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    File URL: http://hdl.handle.net/10.1111/j.1468-5876.2009.00503.x
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    Cited by:

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    2. Magazzino, Cosimo & Brady, Gordon L. & Forte, Francesco, 2019. "A panel data analysis of the fiscal sustainability of G-7 countries," The Journal of Economic Asymmetries, Elsevier, vol. 20(C).
    3. Serju-Thomas, Prudence, 2020. "Fiscal sustainability: The case for Jamaica," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 1(1).
    4. 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(1), pages 117-154, February.
    5. 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.
    6. Bhavesh Garg, 2023. "Effectiveness of Monetary and Fiscal Policy in Mitigating Pandemic-Induced Macroeconomic Impacts," Working Papers DP-2023-20, Economic Research Institute for ASEAN and East Asia (ERIA).
    7. Huang, Jiexiang & Guo, Wei & Zhang, Jin E., 2020. "Do stocks outperform bank deposits in China?," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    8. Matsuoka, Hideaki, 2015. "Fiscal limits and sovereign default risk in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 13-30.
    9. Sakuragawa, Masaya & Hosono, Kaoru, 2011. "Fiscal sustainability in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 434-446.
    10. Miyazaki, Tomomi, 2014. "Fiscal reform and fiscal sustainability: Evidence from Australia and Sweden," International Review of Economics & Finance, Elsevier, vol. 33(C), pages 141-151.
    11. Selahattin Imrohoroglu, 2017. "Replacing Income Taxation with Consumption Taxation in Japan," CIGS Working Paper Series 17-008E, The Canon Institute for Global Studies.
    12. Tamegawa, Kenichi, 2016. "Rating for government debt and economic stability," The Journal of Economic Asymmetries, Elsevier, vol. 13(C), pages 35-44.
    13. Akira Okamoto, 2025. "The optimum quantity of debt for an aging Japan: welfare and demographic dynamics," The Japanese Economic Review, Springer, vol. 76(1), pages 1-52, January.
    14. Naoyuki Yoshino & Uwe Vollmer, 2014. "The sovereign debt crisis: why Greece, but not Japan?," Asia Europe Journal, Springer, vol. 12(3), pages 325-344, September.
    15. Arai, Real & Ueda, Junji, 2013. "A numerical evaluation of the sustainable size of the primary deficit in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 30(C), pages 59-75.
    16. Kazuki Hiraga & Kengo Nutahara, 2019. "Fragility in modeling consumption tax revenue," CIGS Working Paper Series 19-003E, The Canon Institute for Global Studies.
    17. Naoyuki Yoshino & Tetsuro Mizoguchi, 2013. "Change in the Flow of Funds and the Fiscal Rules Needed for Fiscal Stabilization," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(1), pages 51-70, January.
    18. Sakuragawa, Masaya & Sakuragawa, Yukie, 2020. "Government fiscal projection and debt sustainability," Japan and the World Economy, Elsevier, vol. 54(C).
    19. Ko, Jun-Hyung & Morita, Hiroshi, 2015. "Fiscal sustainability and regime shifts in Japan," Economic Modelling, Elsevier, vol. 46(C), pages 364-375.

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    Keywords

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    JEL classification:

    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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