Front Matter Page

© 2000 International Monetary Fund

November 2000

IMF Country Report No. 00/144

Japan: Selected Issues

This Selected Issues report on Japan was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with this member country. As such, the views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Japan or the Executive Board of the IMF.

International Monetary Fund

Washington, D.C.

Front Matter Page

INTERNATIONAL MONETARY FUND

JAPAN

Selected Issues

Prepared by J. Morsink, R. Ramaswamy, M. Mütleisen, T. Nagaoka (all APD), H. Samiei (EUI) and H. Faruqee (RES)

Approved by the Asia and Pacific Department

October 13, 2000

Contents

• I. Population Aging and Its Macroeconomic Implications

  • A. Introduction

  • B. Demographic Trends

  • C. Age-Earnings Profiles in Japan

  • D. Multimod Simulations

  • E. Conclusions

  • Annex 1

  • Annex II

  • References

• Figures

• I.1. Total Fertility Rate (TFR), 1950–2050

• I.2. “Birth” Rate and Population Growth, 1960–2150

• I.3. Elderly Dependency Ratio, 1960–2150

• I.4. Age-Earnings Distributions Japan, 1970–1997

• I.5. Multimod Simulation Effects of Population Aging and Decline

• I.6. Multimod Simulation Effects of Pension Reform

• Tables

• I.1. Simulated Effects of Population Aging in Japan

• I.2. Simulated Effects of Pension Reform in Japan

• II. Sustainable Fiscal Policies for an Aging Population

  • A. Introduction

  • B. Social Security and Government Finances

  • C. A Long-Term Baseline Simulation for Government Finances

  • D. Policy Analysis

  • E. Conclusions

  • Annex

  • References

• Figures

• II. 1. Social Security and Welfare Expenditure by Revenue, Scheme and Category, FY1997

• II.2. Demographic Projections

• II.3. Social Security Operations, 1970–2070

• II.4. General Government Operations, 1970–2070

• II.5. Macroeconomic Effects of Fiscal Consolidation Strategies

• II.6. Macroeconomic Effects of Social Security Reform

• Tables

• II.1. Old-Age Dependency Ratios

• II.2. Public Pension Expenditure, 1995

• II.3. Public Health Expenditure, 1995

• II.4. General Government Finances, 1999

• II.5. Projected Social Security Operations, 1998–2050

• II.6. Sensitivity Analysis: Social Security Indicators, 2050

• II.7. Finances of Social Security, FY1998

• II.8. Major Factors in Modeling Social Security Finances

• III. The Yen-Dollar Rate: Have Interventions Mattered?

  • A. Introduction

  • B. Foreign Exchange Interventions in Practice

  • C. Sterilized Versus Unsterilized Interventions

  • D. Interventions and the Exchange Rate

  • E. Triggers for Interventions

  • F. Conclusions

  • References

• Figures

• III.1 Foreign Exchange Interventions in the Yen-Dollar Market

• III.2. Exchange Rate Interventions

• III.3. Exchange Rate Comparisons

• Tables

• III. 1. Estimated Error Correction Model of Interventions Based on Cointegrating VAR

• III.2. Parsimonious Estimated Error Correction Model of Interventions Based on Cointegrating VAR

• III.3 Estimated GARCH(1, 1) Model of Interventions

• III.4. Probit Model of Triggers for Interventions

• IV. Deposit Insurance Reform

  • A. Introduction

  • B. Background

  • C. Design of Limited Deposit Insurance and Bank Resolution Tools

  • D. Addressing Remaining Bank Weaknesses

  • References

• Tables

• IV. 1. G7 Countries: Ratio of Deposit Coverage to Per Capita GDP, 1999

• V. Japan: The Unemployment Deflation Puzzle

  • A. Introduction

  • B. Measurement Bias in the CPI—Not A Major Cause

  • C. Prices and Unemployment

  • D. Downward Rigidity of Wages

  • E. Pricing Behavior of Companies

  • F. Household and Business Perceptions About Price Development

  • G. Conclusions

  • References

• Figures

• V.1. Price Developments

• V.2. Development of Output Gap, Unemployment, and Core CPI

• V.3. Unemployment and Core CPI

• V.4. Results of the One-Step Forecast Test

• V.5. Development of Nominal Cash Earnings

• V.6. Unemployment and Nominal Wages

• V.7. Part-Time Employment

• V.8. Composition of Unemployment

• V.9. Development of Structural Unemployment

• V.10. Composition of Shareholders

• V.11. Corporate Markups

• V.12. Perceived and Actual Development of Prices by Different Sectors

• V.13. Gaps Between Corporate Sector’s Perception of Future and Current Prices

• Tables

• V.I. Selected Indicators

• V.2. Estimate of Reduced Form Phillips Curve, 1983Q1–1994Q4