Front Matter

Author(s):
Keimeir Kaizuka, and Anne Krueger
Published Date:
July 2006
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    © International Monetary Fund 2006

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    Library of Congress Cataloging-in-Publication Data

    Tackling Japan’s fiscal challenges: strategies to cope with high public debt and population aging / edited by Keimei Kaizuka & Anne O. Krueger.

    • p. cm.

    Papers presented at a conference organized by the Policy Research Institute of Japan’s Ministry of Finance and the International Monetary Fund in June 2005.

    Includes bibliographical references and index.

    ISBN 0-230-00787-2 (cloth)

    1. Fiscal policy—Japan—Congresses. 2. Debts, Public—Japan—Congresses. 3. Budget deficits—Japan—Congresses. 4. Older people—Japan—Congresses. I. Kaizuka, Keimei, 1934- II. Krueger, Anne O.

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    List of Tables

    List of Figures

    Notes on Contributors

    Henry J. Aaron—Bruce and Virginia MacLaury Senior Fellow, The Brookings Institution.

    Shun-ichiro Bessho—Assistant Professor, School of International and Public Policy, Hitotsubashi University; former Economist, Policy Research Institute, Ministry of Finance.

    Robert Dekle—Professor, Department of Economics, University of Southern California.

    Daniel Citrin—Deputy Director, Asia and Pacific Department, International Monetary Fund.

    Masayoshi Hayashi—Associate Professor, School of International and Public Policy, Hitotsubashi University; former Principal Economist, Policy Research Institute, Ministry of Finance.

    Peter S. Heller—Deputy Director, Fiscal Affairs Department, International Monetary Fund.

    R. Glenn Hubbard—Dean and Russell L. Carson Professor of Finance and Economics, Dean of the Graduate School of Business and Professor of Economics, Columbia University; and Research Associate, National Bureau of Economic Research.

    Toshihiro Ihori—Professor, Faculty of Economics, University of Tokyo.

    Yutaka Imai—former member of the Economics Department at the OECD, and currently Professor of Economics at Osaka University and senior visiting Economist at the Policy Research Institute of the Japanese Ministry of Finance.

    Hiromitsu Ishi—Emeritus Professor, Hitotsubashi University, Tokyo.

    Takatoshi Ito—Professor, Graduate School of Business and Graduate School of Public Policy, University of Tokyo; and Research Associate, National Bureau of Economic Research.

    Yasushi Iwamoto—Professor, Department of Economics, University of Tokyo.

    Keimei Kaizuka—Honorary President, Policy Research Institute, Ministry of Finance Professor, Chuo University.

    Ryuta Ray Kato—Associate Professor, Graduate School of International Relations, International University of Japan.

    Masumi Kawade—Associate Professor, Faculty of Economics, Niigata University.

    Laurence J. Kotlikoff—Professor of Economics, Boston University.

    Anne O. Krueger—First Deputy Managing Director, International Monetary Fund.

    Kenneth N. Kuttner—Danforth-Lewis Professor of Economics, Economics Department, Oberlin College.

    Howard Oxley—Senior Economist, Health Division, Employment and Social Affairs Directorate, OECD.

    Eiji Tajika—Dean, Graduate School of International and Public Policy, Professor, Graduate School of Economics, Hitotsubashi University.

    Toshiki Tomita—Professor, Faculty of Law, Chuo University.

    Isamu Ueda—Senior Vice Minister of Finance, Ministry of Finance.

    David E. Weinstein—Professor, Department of Economics, Columbia University.

    Yuji Yui—Dean, Department of Economics, Seijo University.

    Naoyuki Yoshino—Professor of Economics, Keio University.

    Preface

    The chapters in this volume were presented at a two-day conference organized by the Policy Research Institute of Japan’s Ministry of Finance (MOF) and the International Monetary Fund in June 2005. The conference brought together leading experts from Japan and abroad for a wide-ranging discussion of the fiscal challenges facing Japan. We are grateful to all the distinguished participants whose knowledge and dedication helped make the conference a resounding success.

    The timing of our gathering was not accidental. As the Japanese economy finally emerges from a long period of weak growth and falling prices burdened by record-high public debt, fiscal adjustment has taken center stage in the policy agenda and the public debate. Growing demands on the budget from a rapidly aging society have added urgency to the need to rein in public indebtedness and revamp the pension and health care systems.

    The structure of this volume echoes that of the MOF-IMF conference on which it is based. Following opening remarks from Senior Finance Minister Ueda, Chapters 1 and 2 provide the backdrop with an overview of Japan’s fiscal history and prospects. Chapters 3 and 4 focus on the impact of demographic changes on fiscal trends and potential growth. Chapters 5 and 6 look at strategies to restore fiscal sustainability over the medium term. Chapters 7 and 8 tackle options for fiscal decentralization and the rationalization of local government finances. Finally, Chapters 9-12 address the issues of creating a financially sound system of social programs.

    The picture that comes out from these chapters is broad in scope and depth and we hope this volume offers a useful contribution to the policy debates on these important issues.

    Keimei Kaizuka

    Anne O. Krueger

    Opening Remarks by the Senior Vice Minister of Finance, Isamu Ueda

    First Deputy Managing Director Krueger, distinguished participants, ladies and gentlemen.

    It is both a great honor and a profound privilege for me to be here today to say a few words at the opening of this conference.

    At the outset, on behalf of the Ministry of Finance of Japan, I wish to extend our warmest welcome to all of you here. I also would like to express our sincere appreciation to the International Monetary Fund for working with us to organize this gathering.

    On this occasion, I would like to briefly explain Japan’s current fiscal situation and its fiscal policy.

    The Japanese economy has emerged from a prolonged recession following the progress made in structural reforms both in the public and private sectors. The economy is now in a recovery phase led mainly by domestic private demand, without any recourse to fiscal stimulus.

    On the other hand, the fiscal situation in Japan remains extremely severe, with the nation suffering under the largest fiscal deficit among the major advanced economies. The imbalances between expenditures and tax revenues have continued to widen due to the expenditure increases and tax reductions included in successive stimulus packages introduced to counter the slump that hit Japan after the collapse of the bubble economy. The hike of social security expenditures stemming from our aging population has also helped amplify those imbalances. The ratio of gross government debt to GDP has climbed rapidly and is currently the most lopsided among the major industrialized countries, most of which have managed to contain their ratios at previous levels or, in some cases, even consolidated them. Japan’s dire fiscal situation could hamper both Japanese and global growth.

    In my view, Japan needs to deal quite urgently with its fiscal challenges. The Japanese population is aging faster than any other in the industrialized world, and within ten years—that is, by the early 2010s—Japan’s baby-boomers, who have been the core of the labor force, will be retiring in large numbers and becoming pension beneficiaries. Furthermore, if the current fiscal situation is left untouched and continues to deteriorate, concerns may well arise over Japan’s fiscal sustainability, thereby leading to interest rate hikes and the dragging down of the economic recovery. Against these backdrops, Japan must, in my opinion, move quickly to tackle fiscal structural reform.

    In recent years, we have coped with these issues mainly through expenditure curtailments, and we will continue to put forward thorough expenditure reform by comprehensively reviewing the social security system and by downsizing both the central and local governments.

    Looking forward, the establishment of a sustainable social security system would constitute an important element for maintaining fiscal sustainability. If nothing is done, the benefits and burdens of social security in Japan will increase beyond economic growth. In order to build a sustainable social security system, we should aim at adjusting the size of the benefits and burdens so that the system suits the size of the economy, while comprehensively considering all factors such as pensions, medical care, and nursing care. It is also important to review the current sharing of roles between self-help efforts and public support, and to bring about changes in public awareness by helping the public realize the importance of fostering the next generation and by working to change the traditional view that looks upon all elderly citizens as weak.

    Local government fiscal reform is essential as well. We are determined to promote vigorously the ongoing reform aimed at expanding the authority and responsibility of local governments while streamlining government at the national and local levels.

    Turning to the revenue side, we are planning to implement fundamental tax reform, including the reform of consumption tax, by around FY 2007. We will establish a sustainable tax system that supports Japanese society in light of its falling birth rate and aging population and that also leads to confidence in the future among Japanese people.

    As for individual income tax, it is very important to restore its basic functions as the “main tax” for raising revenues and redistributing income by broadening the tax base.

    With regard to consumption tax, it is also very important to ensure that the burden is shared broadly and fairly among all generations as well as to sustain the stable provision of necessary public services such as social security benefits.

    With those efforts, the government is determined to achieve a primary surplus in the early 2010s. Following our previous efforts, the ratio of primary balance to GDP is expected to improve in the two consecutive years after FY 2003. We will promote further fiscal structural reforms on both the revenue and expenditure sides.

    This conference brings together distinguished academics and senior officials from the Fund and the Ministry of Finance. Given the dire fiscal situation in Japan, fiscal reform is a formidable challenge. Indeed, it is, as I have stated, the paramount issue confronting the nation. This two-day conference is designed to provide an opportunity for candid and frank discussion on the long-term fiscal challenges facing Japan including the future prospects and strategies for fiscal consolidation. I sincerely hope that the talks today and tomorrow will provide us with insightful suggestions on future policy options, helping to guide us toward a sustainable fiscal structure in Japan.

    I would like to close my remarks by wishing you and this conference a wealth of fruitful discussion.

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