RIETI Report October 2014

A Downturn Not Much Different from Those in the Past

Japan's biggest domestic concern is the sustainability of its public finance. The government debt to gross domestic product (GDP) ratio is at the highest level since the prewar days and continues to expand. Because the primary cause is the rapid rise in social security costs and the shortfalls in revenue, both of which are associated with the rapid aging of the population, painful reforms, such as curbing social security costs and increasing taxes, cannot be avoided. As such, legislative measures addressing the reform of the social security and taxation systems are needed. In the October issue of the RIETI Report, we present RIETI Consulting Fellow Kazumasa Oguro's column "A Downturn Not Much Different from Those in the Past."

Oguro first looks at the effect of the consumption tax increase on the economic growth rate. Analyzing and comparing data from this year's increase with those from 1989 and 2014, he argues that the current downtrend is not out of line with the previous ones and that gradual economic recovery is expected to continue in the months ahead. Oguro warns that if there is a great deal of uncertainty about when measures such as the consumption tax increase will be implemented by policy makers, the negative impact on allocation of resources will be even larger, and proposes continuing with the increase of the consumption tax rate to 10% by October 2015 as originally proposed.

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A Downturn Not Much Different from Those in the Past

OGURO KazumasaConsulting Fellow, RIETI

Japan's biggest domestic concern is the sustainability of its public finance. The government debt to gross domestic product (GDP) ratio is at the highest level since the prewar days and continues to expand. This is simply delaying an excessive debt burden for future generations. Because the primary cause is the rapid rise in social security costs and the shortfalls in revenue, both of which are associated with the rapid aging of the population, the painful reforms, such as curbing social security costs and increasing taxes, cannot be avoided.

Under such circumstances, in August 2012, legislation relating to comprehensive reform of social security and taxation systems, including consumption tax increases, was enacted. The legislation includes a two-stage increase of the consumption tax rate, and the first increase—from 5% to 8%—was implemented in April 2014. If everything goes as scheduled, the next tax increase—from 8% to 10%—will take place in October 2015.

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