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Japanese Aging and Public Capital Formation


  • Hiroshi Yoshida

    (Professor, Tohoku University)


This research aims to show the desirable investment level and method through the analysis of the effect of public capital investment in an economy experiencing aging of population structure. This paper comprises three major parts. In the first part, the current state of expenditure for the Japanese public capital investment, its effect on the equality between generations, and empirical research on the relationship between aging and public capital development are examined. In the section I of the first part, it is verified by using national accounts that the formation of public capital has been greatly restrained since 2000 with the progress of the recent fiscal reform. On that basis, it is calculated using generational accounting, to what degree the decrease of government spending through the restraint of public capital investment reduces the burden of the next generation through the future decrease of government debt. As a result, it is shown that the restraint of public capital investment only would not resolve entirely the future government debt (generational imbalances). However, this generational accounting does not quantify the negative effect such as the decrease of productivity and benefits. In the following section II, in order to know the actual effect of population structure on government expenditure, the ratio of the government expenditure against GDP of OECD countries is studied using regression analysis. Estimation shows significantly negative coefficients with relation to the population growth rate in the case of the total government expenditure. However, the influence of population on fixed capital formation is not verified. Based on this result, it is indicated that declining population growth rate owing to the advance of aging of society may increase the total expenditure of government but has no obvious influences on public capital investment expenditure. In the second part, optimal public investment is theoretically examined and empirically confirmed using the data of Japanese prefectures. Therefore, in the section III, the conditions for optimal public capital investment level are surveyed based on theory model of Glomm and Ravikumar (1997). As a result, under certain circumstances, optimal tax rate, which maximises the growth rate of private capital, equals to the marginal productivity of public capital expressed in the elasticity. Therefore, in section IV, using the public capital investment (public fixed capital formation), private investment, prefectural population from 1998 to 2004 calculated by prefectural accounts, the production function having gross prefectural product as explained variables is estimated. Although there is a problem of using flow data for investment, it clarifies that simple average value of partial regression coefficients relating to the marginal productivity of public capital among prefectures is around 0.06, and it varies widely among prefectures. Furthermore, using this result, the divergence between the marginal productivity of public capital and tax rates of public capital defined in this paper is estimated for each prefecture. The result shows that the divergence between productivity and tax rate varies significantly between prefectures in 1998, while productivity parameter exceeds tax rates in each region in 2004, which indicates the possibility of the lack of public capital investment. In the section V of the third part, in order to learn the timing and the method of desirable investment on the public capital where aging of society is advancing, simulation analysis employing the simple overlapping generation model of Auerbach and Kotlikoff (1987) is conducted. The result says that although capital deepening in which the capital stock per labourer increases occurs in the process of aging, it does not necessarily result in a higher utility in life time of each generation and that a larger public capital is not always fit for the aging society with less young labour, when evaluated in the life time utility of each generation. It is also indicated that financing with tax is desirable because a part of private capital is crowded-out when public capital investment is funded by debt. Lastly, an example that in an economy where public capital investment is lower than the optimal level, raising tax rate gradually in a transitional process enables to improve the utility of the future generation of a society affected by aging and decline of population without widening the imbalance of the utility between generations considerably is described.

Suggested Citation

  • Hiroshi Yoshida, 2010. "Japanese Aging and Public Capital Formation," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 6(1), pages 121-152, February.
  • Handle: RePEc:mof:journl:ppr007f

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    References listed on IDEAS

    1. Glomm, Gerhard & Ravikumar, B., 1997. "Productive government expenditures and long-run growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 183-204, January.
    2. 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.
    3. Alesina, Alberto & Wacziarg, Romain, 1998. "Openness, country size and government," Journal of Public Economics, Elsevier, vol. 69(3), pages 305-321, September.
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