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Abstract
Japan has sustained fiscal deficits over many years that have led to a dramatic increase in public debt. Large fiscal deficits have resulted from persistently low growth—reflecting a trend decline in productivity, a shrinking labor force, and low investment—as well as the needs of a rapidly aging population, and a series of policy missteps. At the same time, private saving has remained high, helping Japan maintain persistent external surpluses. Unsustainable fiscal imbalances pose risks to domestic stability, and also carry risks for the global economy. Growth-enhancing structural reforms (to boost investment and potential growth) and fiscal consolidation measures (through a combination of entitlement reform and tax measures) are needed to reduce imbalances and anchor sustainability.
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