Aging Population and Fiscal Stability condition ... Aging Population and Fiscal Stability condition

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  • Aging Population and Fiscal Stability condition faced with population Aging

    Naoyuki Yoshino, Ph.D. Dean, ADB Institute, yoshino@econ.keio.ac.jp

    Tetsuro Mizoguchi, Ph.D. Reitaku University, tmizo@reitaku-u.ac.jp

    Farhad Taghizadeh-Hesary, Ph.D. Keio University, farhadth@z3.keio.jp

    Tokyo Fiscal Forum IMF-ADBI-PRI June 11, 2015

  • Background (Background) • Japan entered into the aged-society  Japan faces the huge increases of social security. • Japan accumulate the huge budget deficits → Managing the demand for government bonds are very important. (Main Purpose) We propose the fiscal policy rules that attain both the fiscal sustainability and the economic recovery facing with aging-society.

  • Objectives & Main Results 1. Domar rule(interest rate < economic growth) Bohn’s condition 𝑷𝑷𝒕 = 𝑷𝑷𝟏 + 𝝁 𝒃𝒕−𝟏 − 𝒃𝟎 Obtained from Government Budget Constraint 2. Supply of Government bond Demand for Government bond is neglected Bohn’s condition does not satisfy economic recovery Objective loss function focuses only on the stability of the budget and not on economic growth. 3. New Fiscal Policy Rules need to be estabilished.

  • General Questions Japan’s gross Debt/GDP ratio is around 230% Greece gross Debt/GDP ratio is 188%. Why did Greece go into trouble ? Why does JGB interest rate be lowerest? ⇒Three reasons: the demand structure for government bonds; Low Sale Tax Rate(large fiscal space); Independent Monetary Policy

  • 1995 2014

    95.1% 229.6%

    Japan’s Debt /GDP Ratio

    5

    1995 2014 101.2% 188.7%

    Greece Debt / GDP Ratio

    Source: OECD Economic Outlook

  • Gross Debt/GDP ratio, 2014 Selected OECD Countries

    6

    Source: OECD Economic Outlook

    229.6

    188.7

    147.2

    111.1

    35.2 31.6

    13.0

    0.0

    50.0

    100.0

    150.0

    200.0

    250.0 Ja

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    Fr an

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  • 7

    0

    50

    100

    150

    200

    250

    Japan Canada Italy U.S.A Greece

    Gross Debt/GDP ratio (2013) (Selected Countries)

    Data Source:OECD Outlook

  • General Government Net Debt (International Comparison)

    0

    20

    40

    60

    80

    100

    120

    140

    160

    1999200020012002200320042005200620072008200920102011201220132014

    Japan U.K. Germany France Italy Canada

    Source: MOF

    Japan 148.7

  • Japan

    • First we would like to show the Flow of Fund in Japan.

    • Who held JGB? How much? How about Greece?

    • The demand for government bond and holders create different consequences.

    9

  • Recent Money Flow of Japan

    10

    Source: BOJ Flow of Funds

  • 0

    500000

    1000000

    1500000

    2000000

    2500000

    3000000

    3500000

    4000000

    Ju l-9

    1 Ju

    n- 92

    M ay

    -9 3

    Ap r-

    94 M

    ar -9

    5 Fe

    b- 96

    Ja n-

    97 De

    c- 97

    N ov

    -9 8

    O ct

    -9 9

    Se p-

    00 Au

    g- 01

    Ju l-0

    2 Ju

    n- 03

    M ay

    -0 4

    Ap r-

    05 M

    ar -0

    6 Fe

    b- 07

    Ja n-

    08 De

    c- 08

    N ov

    -0 9

    O ct

    -1 0

    Se p-

    11 Au

    g- 12

    Ju l-1

    3 Ju

    n- 14

    Bank Loan (City Banks)

    Bank Loans (Regional Banks I & II)

    Bank Loans of Japan

    11

    Source: BOJ billion Large Banks : 202 trillion yen Regional banks: 216 trillion yen (2014, Nov)

  • Declining Bank Loans in Japan

    1. Stricter Basel Capital Requirement (Basel III) 2. Government Bonds = Zero Risk 3. Declining Domestic Demands for Bank Loans Shift production from Japan to other Asia Low expected rate of return 4. Corporations’ Surplus Profits from Overseas’ production Cash rich companies

    12

  • Changes in Japan’s Money Flow High Growth Period Households Savings  Corporate  Capital Investment Stock S  I  K Recent Period Corporate Savings  Government  Elderly people S  G(B) Abolish Retirement Age Increase working population Pension payment will start 65 or later Wage rate be based on marginal productivity

    13

  • FY 2012 General Account Initial Budget (Japan)

    Source: MOF

  • Local Allocation Tax Grants, etc.

    161,424 16.8%

    Public Works 5,968.5

    6.2% Education & Science 5,442.1

    5.7%

    National Defense 4,884.8

    5.1%

    Others 9,656.8 10.1%

    (Note1)Figures may not add up to the totals due to rounding. (Note2)The ratio of Social Security expenses to General Expenditures*:54.0%

    *General Expenditures equals to the Primary Expenditure minus Local Allocation Tax Grants, etc.

    Social Security 30,517.5

    31.8% General Account

    Total Expenditures 95,882.3 (100.0%)

    Redemption of the National Debt

    13,138.3 13.7%

    Interest Payments 10,131.9

    10.6%

    Primary Expenses 72,612.1

    75.7%

    National Debt Service

    23,270.2 24.3%

    General Account Budget for FY2014 -Breakdown of Expenditure-

    Food Supply 1,050.7 (1.1)

    Promotion of SMEs 185.3 (0.2)

    Energy 964.2 (1.0)

    Former Military Personal Pensions

    444.3 (0.5)

    Economic Assistance 509.8 (0.5)

    Miscellaneous 6,152.6 (6.4)

    Contingency Reserves 350.0 (0.4)

  • Total Account (Initial General and Special Account, 2014)

    [分類名] 91.4

    [パーセンテージ]

    [分類名] [値]

    [パーセンテージ]

    [分類名], [値]

    [パーセンテージ]

    [分類名] [値] [パーセンテージ]

    [分類名] [値]

    [パーセンテージ]

    Total 234.7

    Unit: trillion Yen

  • Budget Allocation of Central Government (Japan, 1985-2011)

    17

    0

    5,000

    10,000

    15,000

    20,000

    25,000

    30,000

    35,000

    Bond Expenditure

    Education

    Social Securities

    Defense

    Exp of Local Government

    National land conservation and development

    Source: MOF Billion yen

  • Trends in Interest Payments and Interest Rate

    18

    Source: MOF

    0

    100

    200

    300

    400

    500

    600

    700

    800

    900

    0

    2

    4

    6

    8

    10

    12

    14

    16

    18

    20

    1975 1980 1985 1990 1995 2000 2005 2010

    Government Bond Outstanding

    Interest Rate

    Interest Payment

    (trillion Yen) (%)

  • Trends in General Account Tax Revenues, Total Expenditures and Government Bond Issues

    0

    20

    40

    60

    80

    100

    120

    Special Deficit-Finanicing Bond Issues

    Construction Bond Issues

    Tax Revenue

    Total Expenditure

    Source: MOF

    Crocodile’s Mouth

  • Population Aging of Japan

    20

    Source:Ministry of Internal Affairs and Communication

    Forecast (2012) 10 of Thousands

    Current Figures

    0.0

    10.0

    20.0

    30.0

    40.0

    50.0

    60.0

    70.0

    0

    2,000

    4,000

    6,000

    8,000

    10,000

    12,000

    14,000 Age 65 and over

    Age 15~64

    Age 14 and less

    Aged Population Ratio Working Population Ratio (15-64) Total Fertality Rate (TFR)

    FY

    Peak of the Population 2004, 127.8 million

  • Total Fertility Rate (TFP) of Major Countries (1980-2015)

    21

    0

    0.5

    1

    1.5

    2

    2.5

    3

    3.5

    4