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Japan's challenging debt dynamics

Author

Listed:
  • Yvan Guillemette
  • Jan Stráský

Abstract

A small simulation model is used to evaluate the contribution that the three arrows of the government’s strategy – bold monetary policy to achieve higher inflation, flexible fiscal policy and growth-boosting structural reforms – could make to reversing the rise in Japan’s public debt ratio, currently about 230% of GDP. The findings indicate that with fiscal consolidation amounting to around 7½ percentage points of GDP by 2020, modestly higher growth coming from increased female labour force participation and higher productivity growth, as well as inflation gradually rising to 2% thanks to unconventional monetary policy measures, the debt ratio could be put on a downward trajectory by the end of this decade, although it is likely to remain above 200% of GDP in 2035. Among the many uncertainties surrounding this scenario, the risk of a larger-than-projected increase in interest rates stands prominently and could prevent the turnaround in debt dynamics. JEL classification codes: E63; H68. Keywords: Japan; debt; deficit; fiscal; budget; projection; simulation; arrow; consolidation; growth; inflation; reform.

Suggested Citation

  • Yvan Guillemette & Jan Stráský, 2014. "Japan's challenging debt dynamics," OECD Journal: Economic Studies, OECD Publishing, vol. 2014(1), pages 97-108.
    • Handle: RePEc:oec:ecokac:5jxvbssqsvmv
    DOI: 10.1787/eco_studies-2014-5jxvbssqsvmv
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    Cited by:

    1. 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.
    2. Łukasz Rawdanowicz & Romain Bouis & Kei-Ichiro Inaba & Ane Kathrine Christensen, 2014. "Secular Stagnation: Evidence and Implications for Economic Policy," OECD Economics Department Working Papers 1169, OECD Publishing.
    3. Randall S. Jones & Kohei Fukawa, 2015. "Achieving Fiscal Consolidation while Promoting Social Cohesion in Japan," OECD Economics Department Working Papers 1262, OECD Publishing.

    More about this item

    Keywords

    japan; debt; deficit; fiscal; budget; projection; simulation; arrow; consolidation; growth; inflation; reform.;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt

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