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Strategies for Fiscal Consolidation in Japan

  • Dennis P. J. Botman
  • Papa M'B. P. N'Diaye
  • Hali J. Edison

Japan's key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF's Global Fiscal Model. The results suggest that: (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures; (ii) achieving primary balance is not sufficient to stabilize the net debt ratio; (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies; (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation; and (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/37.

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Length: 22
Date of creation: 01 Feb 2007
Date of revision:
Handle: RePEc:imf:imfwpa:07/37
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  1. Douglas Laxton & Paolo Pesenti, 2003. "Monetary Rules for Small, Open, Emerging Economies," NBER Working Papers 9568, National Bureau of Economic Research, Inc.
  2. Galí, Jordi & López-Salido, J David & Vallés Liberal, Javier, 2005. "Understanding the Effects of Government Spending on Consumption," CEPR Discussion Papers 5212, C.E.P.R. Discussion Papers.
  3. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  4. Dirk Muir & Douglas Laxton & Dennis P. J. Botman & Andrei Romanov, 2006. "A New-Open-Economy Macro Model for Fiscal Policy Evaluation," IMF Working Papers 06/45, International Monetary Fund.
  5. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  6. Buiter, Willem H, 1981. "Time Preference and International Lending and Borrowing in an Overlapping-Generations Model," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 769-97, August.
  7. Fatás, Antonio & Mihov, Ilian, 2001. "The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence," CEPR Discussion Papers 2760, C.E.P.R. Discussion Papers.
  8. Roberto Perotti, 2004. "Estimating the effects of fiscal policy in OECD countries," Working Papers 276, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  9. Dennis P. J. Botman & Keiko Honjo, 2006. "Options for Fiscal Consolidation in the United Kingdom," IMF Working Papers 06/89, International Monetary Fund.
  10. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  11. Manmohan S. Kumar & Dennis P. J. Botman, 2006. "Fundamental Determinants of the Effects of Fiscal Policy," IMF Working Papers 06/72, International Monetary Fund.
  12. Nicoletta Batini & Alessandro Rebucci & Papa M'B. P. N'Diaye, 2005. "The Domestic and Global Impact of Japan's Policies for Growth," IMF Working Papers 05/209, International Monetary Fund.
  13. Tamim Bayoumi & Dennis P. J. Botman & Manmohan S. Kumar, 2005. "Macroeconomic Effects of Social Security and Tax Reform in the United States," IMF Working Papers 05/208, International Monetary Fund.
  14. Christian Broda & David E. Weinstein, 2004. "Happy News from the Dismal Science: Reassessing the Japanese Fiscal Policy and Sustainability," NBER Working Papers 10988, National Bureau of Economic Research, Inc.
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