Fiscal Reform, Government Debt and Female Labor Supply in Japan

This study extends Hansen and Imrohoroglu (2016) by incorporating female labor supply and a home sector into a growth model to assess Japan’s fiscal sustainability and quantify the role of female labor in stabilizing government debt. The model is calibrated to the Japanese economy, which features a sizable gender productivity gap in the market sector, with female labor efficiency below 50% of the male level. Absent policy intervention, model simulations project the debt-to-output ratio to exceed 250% by 2035. Stabilizing debt at 60% of output using the consumption tax alone requires raising the tax rate to 40.9% starting in 2035, followed by a reduction to 24.4% once the target is achieved in 2089. We also find that reforming Japan’s current spousal tax treatment is critical. Removing the current spousal tax treatment together with the debt stabilization improves female labor supply and reduces the required consumption tax rate to 33.9% during 2035–2089 and to 18.2% at the target. Additional simulations likewise highlight the importance of gender equality for labor supply and long-run fiscal outcomes.