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Fiscal Sustainability in Japan

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  • Shiro Armstrong and Tatsuyoshi Okimoto

Abstract

Japanese government debt is at unprecedented levels with a gross debt to gross domestic product ratio of over 230 per cent and a net debt to gross domestic product ratio of 150 per cent. There are three big challenges to fiscal sustainability: the huge amount of government bonds outstanding; continued budget deficits; and the growing age-related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s, there is every likelihood that the Japanese economy will muddle through.

Suggested Citation

  • Shiro Armstrong and Tatsuyoshi Okimoto, 2016. "Fiscal Sustainability in Japan," Asia and the Pacific Policy Studies 201620, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:appswp:201620
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    References listed on IDEAS

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    1. Alan J Auerbach, 2016. "Long-Term Fiscal Sustainability in Advanced Economies," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 3(2), pages 142-154, May.
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    3. R. Anton Braun & Douglas H. Joines, 2014. "The Implications of a graying japan for government policy," FRB Atlanta Working Paper 2014-18, Federal Reserve Bank of Atlanta.
    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, pages 117-154, February.
    5. Takashi Oshio & Oguro, 2013. "Fiscal Sustainability under an Aging Population in Japan: A Financial Market Perspective," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 9(4), pages 735-750, September.
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    Cited by:

    1. Saito, Makoto & 齊藤, 誠, 2020. "Long-run mild deflation under fiscal unsustainability in Japan," Discussion Paper Series 703, Institute of Economic Research, Hitotsubashi University.
    2. Makoto Saito, 2021. "Public Bonds as Money Substitutes at Near-Zero Interest Rates: Disequilibrium Analysis of the Current and Future Japanese Economy," Advances in Japanese Business and Economics, in: Strong Money Demand in Financing War and Peace, pages 79-119, Springer.
    3. 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).
    4. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.

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    Keywords

    intergenerational; fiscal policy; Japan; tax policy; Japanese government bonds;
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