Achieving Fiscal Balance in Japan

Abstract

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.