RIETI Report June 2019

Fiscal sustainability in Japan: What to tackle

Japan leads the advanced economies in the speed and magnitude of demographic ageing and has the highest debt-to-output ratio. Rising social insurance expenditures are projected to far outpace revenues and to create a fiscal burden. This column presents sobering projections for Japanese government debt in the absence of reform, but argues that a combination of policies, including policies to encourage greater labor participation by women and to enhance productivity, could achieve sustainability.

The June, 2019 Issue of the RIETI Report features "Fiscal sustainability in Japan: What to tackle," a column by RIETI Fellow Sagiri Kitao and et al. In this column, they address that achieving fiscal sustainability is not impossible, combining policies such as raising the full retirement age to 67, reducing pension benefits, increasing women's earnings and employment characteristics to match those of men, and so forth.

This month's featured article

Fiscal sustainability in Japan: What to tackle

Selahattin İMROHOROĞLUProfessor of Finance and Business Economics, Marshall School of Business, University of Southern California

KITAO SagiriFaculty Fellow, RIETI

YAMADA TomoakiProfessor of Economics, Meiji University

Japan is ageing fast. Its dependency ratio, defined as the ratio of the population aged 65 and above to the population aged 20-64, was 48% in 2015. It is predicted to rise to 80% by the early 2050s and to stay at around 80% during the second half of the century.

Expenditures for age-related social insurance programmes – such as pensions, public health care, and long-term care insurance – are projected to rise significantly, far outpacing the projected revenues and insurance premia collected as the size of the working age population continues to shrink rapidly. Previous research found that a major increase in taxation, in the order of 30-50% of total consumption, would be needed to finance the demographic transition without any reform (e.g. Braun and Joines 2015, Kitao 2015, Hansen and Imrohoroglu 2013); otherwise, debt will reach an unsustainable level in the not too distant future (e.g. Doi, et al 2011, Hoshi and Ito 2014).

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