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Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model

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  • Ichiro Muto

    (Bank of Japan)

  • Takemasa Oda

    (Bank of Japan)

  • Nao Sudo

    (Bank of Japan)

Abstract

Due to a sharp decline in the fertility rate and a rapid increase in longevity, Japan's population aging is the furthest advanced in the world. In this study we explore the macroeconomic impact of population aging using a full-fledged overlapping generations model. Our model replicates well the time paths of Japan's macroeconomic variables from the 1980s to the 2000s and yields future paths for these variables over a long horizon. We find that Japan's population aging as a whole adversely affects GNP growth by dampening factor inputs. It also negatively impacts on GNP per capita, especially in the future, mainly due to the decline in the fraction of the population of working-age. For these findings, fertility rate decline plays a dominant role as it reduces both labor force and saver populations. The effects of increased longevity are expansionary, but relatively minor. Our simulations predict that the adverse effects will expand during the next few decades. In addition to closed economy simulations, we examine the consequences of population aging in a small open economy setting. In this case a decline in the domestic capital return encourages investment in foreign capital, mitigating the adverse effects of population aging on GNP.

Suggested Citation

  • Ichiro Muto & Takemasa Oda & Nao Sudo, 2012. "Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model," Bank of Japan Working Paper Series 12-E-9, Bank of Japan.
  • Handle: RePEc:boj:bojwps:12-e-9
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christine Ma & Chung Tran, 2016. "Fiscal Space under Demographic Shift," ANU Working Papers in Economics and Econometrics 2016-642, Australian National University, College of Business and Economics, School of Economics.
    2. Jong-Won Yoon & Jinill Kim & Jungjin Lee, 2014. "Impact of Demographic Changes on Inflation and the Macroeconomy," IMF Working Papers 14/210, International Monetary Fund.
    3. Nao Sudo & Yasutaka Takizuka, 2018. "Population Aging and the Real Interest Rate in the Last and Next 50 Years -- A tale told by an Overlapping Generations Model --," Bank of Japan Working Paper Series 18-E-1, Bank of Japan.
    4. repec:vul:omefvu:v:8:y:2017:i:1:id:216 is not listed on IDEAS
    5. Willem Devriendt & Freddy Heylen, 2017. "Macroeconomic Effects Of Demographic Change In An Olg Model For A Small Open Economy - The Case Of Belgium -," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 17/931, Ghent University, Faculty of Economics and Business Administration.
    6. Kosuke Aoki & Naoko Hara & Maiko Koga, 2017. "Structural Reforms, Innovation and Economic Growth," Bank of Japan Working Paper Series 17-E-2, Bank of Japan.
    7. Ko, Jun-Hyung & Morita, Hiroshi, 2015. "Fiscal sustainability and regime shifts in Japan," Economic Modelling, Elsevier, vol. 46(C), pages 364-375.

    More about this item

    Keywords

    Population Aging; Overlapping Generations Model; Capital Flow;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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