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Achieving Fiscal Balance in Japan

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Abstract

Japan’s population is aging fast and the ratio of Japanese Government Bonds (JGBs) to GDP is highest among advanced economies. In addition, further government spending is expected, causing concerns about the potential for JGBs to become a significant global issue. In this paper we build a micro-data based, large-scale overlapping generations model for Japan in which individuals differ in age, gender, employment type, income, and asset holdings, and incorporate the Japanese pension rules in detail. We estimate age-consumption and age-earnings profiles from micro data, assume complete markets and use these to generate tax revenues and transfer payments for government accounts. We calibrate the model so that it replicates the main macroeconomic and fiscal indicators for 2010. Using existing pension law and fiscal parameters and the medium variants of fertility and survival probability projections, we produce future time paths for JGBs and the pension fund.

Suggested Citation

  • Sagiri Kitao & Selahattin Imrohoroglu & Tomoaki Yamada, 2013. "Achieving Fiscal Balance in Japan," Economics Working Paper Archive at Hunter College 441, Hunter College Department of Economics.
  • Handle: RePEc:htr:hcecon:441
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    1. Fumio Hayashi & Edward C. Prescott, 2004. "The 1990s in Japan: a lost decade," Chapters,in: The Economics of an Ageing Population, chapter 2 Edward Elgar Publishing.
    2. Imrohoroglu, Selahattin & Sudo, Nao, 2011. "Will a Growth Miracle Reduce Debt in Japan?," Economic Review, Hitotsubashi University, vol. 62(1), pages 44-56, January.
    3. Takeo Hoshi & Takatoshi Ito, 2012. "Defying Gravity: How Long Will Japanese Government Bond Prices Remain High?," NBER Working Papers 18287, National Bureau of Economic Research, Inc.
    4. Masaya Sakuragawa & Kaoru Hosono, 2010. "Fiscal Sustainability Of Japan: A Dynamic Stochastic General Equilibrium Approach," The Japanese Economic Review, Japanese Economic Association, vol. 61(4), pages 517-537, December.
    5. Selahattin Imrohoroglu & Nao Sudo, 2011. "Productivity and Fiscal Policy in Japan: Short-Term Forecasts from the Standard Growth Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 29, pages 73-106, November.
    6. Doi, Takero & Hoshi, Takeo & Okimoto, Tatsuyoshi, 2011. "Japanese government debt and sustainability of fiscal policy," Journal of the Japanese and International Economies, Elsevier, vol. 25(4), pages 414-433.
    7. Kjetil Storesletten, 2003. "Fiscal Implications of Immigration-A Net Present Value Calculation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 487-506, September.
    8. Gunji, Hiroshi & Miyazaki, Kenji, 2011. "Estimates of average marginal tax rates on factor incomes in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 25(2), pages 81-106, June.
    9. Genda, Yuji & Kambayashi, Ryo, 2002. "Declining Self-Employment in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 16(1), pages 73-91, March.
    10. Jeremy Lise & Nao Sudo & Michio Suzuki & Ken Yamada & Tomoaki Yamada, 2014. "Wage, Income and Consumption Inequality in Japan, 1981-2008: from Boom to Lost Decades," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 582-612, October.
    11. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
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    Citations

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    Cited by:

    1. Gary Hansen & Selahattin Imrohoroglu, 2016. "Fiscal Reform and Government Debt in Japan: A Neoclassical Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 201-224, July.
    2. repec:eee:jjieco:v:46:y:2017:i:c:p:17-26 is not listed on IDEAS
    3. Selahattin Imrohoroglu, 2017. "Replacing Income Taxation with Consumption Taxation in Japan," CIGS Working Paper Series 17-008E, The Canon Institute for Global Studies.
    4. Kitao, Sagiri, 2015. "Pension reform and individual retirement accounts in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 111-126.
    5. George Kudrna & Chung Tran & Alan Woodland, 2015. "Facing Demographic Challenges: Pension Cuts or Tax Hikes," ANU Working Papers in Economics and Econometrics 2015-626, Australian National University, College of Business and Economics, School of Economics.
    6. repec:bla:ecinqu:v:55:y:2017:i:3:p:1287-1307 is not listed on IDEAS
    7. Miyazawa, Kensuke & Yamada, Junji, 2015. "The growth strategy of Abenomics and fiscal consolidation," Journal of the Japanese and International Economies, Elsevier, vol. 37(C), pages 82-99.
    8. Kitao, Sagiri, 2015. "Fiscal cost of demographic transition in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 37-58.
    9. Nakajima, Tomoyuki & Takahashi, Shuhei, 2017. "The optimum quantity of debt for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 46(C), pages 17-26.
    10. Ko, Jun-Hyung & Morita, Hiroshi, 2015. "Fiscal sustainability and regime shifts in Japan," Economic Modelling, Elsevier, vol. 46(C), pages 364-375.
    11. repec:eee:macchp:v2-2493 is not listed on IDEAS
    12. HSU Minchung & YAMADA Tomoaki, 2017. "Population Aging, Health Care, and Fiscal Policy Reform: The challenges for Japan," Discussion papers 17038, Research Institute of Economy, Trade and Industry (RIETI).
    13. repec:red:issued:16-328 is not listed on IDEAS
    14. Braun, R. Anton & Joines, Douglas H., 2014. "The Implications of a graying japan for government policy," FRB Atlanta Working Paper 2014-18, Federal Reserve Bank of Atlanta.
    15. Braun, R. Anton & Joines, Douglas H., 2015. "The implications of a graying Japan for government policy," Journal of Economic Dynamics and Control, Elsevier, vol. 57(C), pages 1-23.
    16. Selahattin Imrohoroglu & Gary Hansen, 2017. "Replacing Income Taxation with Consumption Taxation in Japan," 2017 Meeting Papers 1114, Society for Economic Dynamics.
    17. Shiro Armstrong & Tatsuyoshi Okimoto, 2016. "Fiscal Sustainability in Japan," Asia and the Pacific Policy Studies, Wiley Blackwell, vol. 3(2), pages 235-243, May.
    18. Selahattin İmrohoroğlu & Sagiri Kitao & Tomoaki Yamada, 2017. "Can Guest Workers Solve Japan'S Fiscal Problems?," Economic Inquiry, Western Economic Association International, vol. 55(3), pages 1287-1307, July.
    19. repec:eee:japwor:v:42:y:2017:i:c:p:12-22 is not listed on IDEAS

    More about this item

    Keywords

    Fiscal balance; Social security; Demographic trends;

    JEL classification:

    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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