International Monetary Fund. Asia and Pacific Dept
This 2019 Article IV Consultation with Japan highlights that the rapid aging and shrinking of Japan’s population has become central to macroeconomic policies and outcomes. The consultation centered on the macroeconomic effects of Japan’s demographics. Mutually reinforcing policies are needed to lift current and expected inflation, stabilize public debt, and raise potential growth. Underlying growth is expected to remain resilient but will be increasingly challenged by slowing external demand and intensifying demographic headwinds. Growth in domestic demand is being eroded by the weaker external environment. Frontloading of private consumption ahead of the October 2019 consumption tax rate increase appears to have been smaller than in 2014.
Ellen R. McGrattan, Kazuaki Miyachi, and Adrian Peralta-Alva
Japan faces the problem of how to finance retirement, health, and long-term care expenditures as the population ages. This paper analyzes the impact of policy options intended to address this problem by employing a dynamic general equilibrium
overlapping generations model, specifically parameterized to match both the macroeconomic and microeconomic level data of Japan. We find that financing the costs of aging through gradual increases in the consumption tax rate delivers a better
macroeconomic performance and higher welfare for most individuals than other financing options, including those of raising social security contributions, debt
financing, and a uniform increase in health and long-term care copayments.