Japan faces rapid and severe demographic aging and rising fiscal deficits due to increasing expenditures and shrinking tax revenues. This paper studies how an inflow or an outflow of foreign workers affects projections of macroeconomic and fiscal variables. We show that foreign workers help slow down a decline in labor force and mitigate fiscal pressures, but effects are not large enough to wipe away concerns even under a very optimistic scenario. We also evaluate effects of foreign workers on skill-specific wages in Japan and welfare consequences across heterogeneous individuals. A rapid rise in the relative size of high-skilled labor force in Japan will give strong downward pressure on skill premium and an arrival of foreign workers is shown to have large differential effects on skill prices and the trend of wage inequality, depending on their size and skill composition.

Japan leads all advanced economies in terms of aging and has the highest debt to GDP ratio. The public pension, medical and long-term care (LTC) expenditures are projected to far outpace revenues and create significant fiscal burdens. In this paper, we develop a detailed overlapping generations model that incorporates the social insurance programs in detail, use most recent estimates from Japanese micro data and government demographic projections to discipline the earnings and labor supply profiles of heterogeneous agents and their cohort shares, and simulate future paths of fiscal and macroeconomic indicators. Our numerical results suggest that absent any change in current policies, Japan will continue to run large pension, public health, LTC, and basic deficits and the debt to GDP ratio will continue to reach unprecedented highs, with interest payments on the debt becoming larger and larger. Although no single policy tool can address fiscal consolidation, a combination of policies is found to achieve sustainability: raise the retirement age to 67, cut pensions by 10%; raise copays of health and LTC insurances to 20%, and find policies to propel female employment and earnings to the levels of their male counterparts, and increase consumption tax rate to 15%. Under these changes, the debt to output ratio in 2050 would be lower than that in 2020.

We construct a transition analysis based on a general equilibrium life-cycle model to investigate the effects of aging, and we evaluate various policy alternatives designed to lessen the negative influence of aging. In particular, we analyze reforms of insurance benefits and tax financing tools that were recently the focus of a great amount of attention and debate in Japan because of the tense financial situation there. We show that although the potential reforms improve the welfare of future generations, the political implementation of such reforms is difficult because of the large welfare costs for the current population. Our analysis suggests that a gradual reform with an intergenerational redistribution will be more politically implementable than an immediate reform.

The labor force in Japan is projected to fall from 64 million in 2014 to 20 million in 2100, signaling unprecedented tax/transfer adjustments to achieve fiscal sustainability. In this paper, we develop a quantitative overlapping generations model to measure the impact of guest worker programs in Japan. Against a baseline general equilibrium transition in which the consumption tax adjusts to achieve fiscal sustainability, we compute alternative transitions with guest worker programs. Depending on the size and skill distribution of guest workers, these programs may mitigate Japan’s fiscal imbalance problem with a relatively manageable increase in the consumption tax.

Japan is aging and has the highest government debt-to-output ratio among advanced economies. In this article, we build a micro data-based, large-scale overlapping generations model for Japan in which individuals differ in age, gender, employment type, income, and asset holdings, and incorporate the Japanese pension rules. Using existing pension law, current fiscal policy, and medium variants of demographic projections, we produce future paths for government expenditures and tax revenues, with implications for government debt and the public pension fund. Additional pension reform, a higher consumption tax, and higher female labor force participation help achieve fiscal stability.