In January 2018, the Cabinet Office released new economic and fiscal projections for medium to long term analysis. These projections are predictions of what would happen to the Japanese economy and fiscal conditions over the next 10 years under the following two scenarios: 1) robust growth scenario that assumes the successful implementation of Abenomics to end deflation and revive the economy, and 2) a baseline scenario that assumes the continuation of the current economic trends (potential growth rate). Under the robust growth scenario, the economy is projected to grow at a pace of about 2% per annum in real terms and more than 3% in nominal terms.
As for fiscal conditions, while the government is set to raise the consumption tax rate to 10% in October 2019, it also plans to offer free day care services and kindergarten classes to all children. As a result, Japan's primary balance would remain negative in FY2020, posting a deficit of 1.8% of gross domestic product (GDP) or 1.8 trillion yen even under the robust growth scenario. However, it would turn positive in FY2027, supported by robust economic growth. Furthermore, outstanding debt of the central and local governments would decrease from 190% of GDP in FY2017 to about 160% in FY2027 with interest rates expected to remain below the rate of economic growth for the time being.
However, the period covered by the latest projections is through FY2027. At some point in the latter half of the 2020s, interest rates would exceed the rate of economic growth and shoot up in the subsequent years.
It should be noted that all of these projections are conditional on a series of assumptions. For instance, the robust growth scenario assumes that total factor productivity (TFP) growth will rise from the current 0.7% to around 1.5%, which is equivalent to the pace observed in the 1980s, i.e., before deflation and population aging began to pose serious problems. It also assumes that the so-called "M-curve" phenomenon, a trajectory of women's labor force participation plotted against age, will be resolved in FY2022 and the labor force participation of the elderly will continue to increase at the current pace.
The high growth estimates under the robust growth scenario are based on the assumption of achieving high productivity and high labor force participation. In other words, their realization is conditional on the success of various government initiatives including the ongoing work style reform. In contrast, under the baseline scenario, Japan's economic growth would hover at around 1.2% per annum in the 2020s, the primary deficit would remain unresolved after 10 years (8.5 trillion yen in FY2027), and the ratio of public debt to GDP would stay high.
Would optimistic projections made under the robust growth scenario help reduce people's anxiety about the sustainability of public finance and social security? Or, would they facilitate reform initiatives, such as those to lift or reform rock-hard regulations, toward the realization of high growth?
Many people would find the robust growth scenario as self-serving and hard to put faith in. Or some people might think that they would be spared of the painful ordeal of structural reform only if Abenomics succeeds. Should this become the case, reform needed to achieve high growth would stall, causing a further delay in fiscal consolidation.
The government has been pursuing two goals, i.e., a primary surplus and a steady decrease in public debt as a share of GDP. According to the projections, it would be possible—at least until around the mid-2020s—to keep to the latter goal under either of the two scenarios. Those insisting that there is no need to hurry to achieve a primary surplus will likely become more vociferous.
A fiscal and economic outlook must be objective and based on conservative assumptions. If the government is to set a new target for fiscal consolidation (primary surplus), it should do so based on the estimates under the baseline scenario. Those under the robust growth scenario are nothing but targets set by the government. Using them as assumptions is tantamount to putting the cart before the horse.
* Translated by RIETI.
February 10, 2018 Weekly Toyo Keizai
