Simulation Analysis of Japan's Fiscal Sustainability

At the outset of this analysis of fiscal sustainability in Japan, we first reviewed the methodologies adopted in previous studies. Taking FY2009 as our starting point, we developed a long-term estimate of fiscal conditions based on the economic and demographic assumptions in the study of pension financing published by the Ministry of Health, Labour and Welfare (Feb. 2009). We then used the results of this estimation to calculate fiscal sustainability gaps for various target scenarios, based on an approach adopted by the European Commission. According to our calculations, the sustainability gap necessary to attain the EU-envisaged target of 60% of adjusted state debt ratio to GDP in 2050 is 6.9% of GDP. The sustainability gap necessary for both state and municipal debt ratio to GDP to attain 60% is 8.2% of GDP. Comparing our results with those in Broda and Weinstein (2005) and Doi (2008), we found that estimates of future expenditure levels in a simulation were a significant factor in determining sustainability gaps. In addition, we considered the interactions between the economy and fiscal conditions, and generated simulation results of mid-term economic and fiscal conditions based on certain scenarios. Finally, we determined various tasks remaining for future research.