Macroeconomic and Fiscal Impacts of Japan’s Aging Population

The aging of Japan’s population will affect both macroeconomic and fiscal developments in the country. The larger the increase in elderly population, the more inter-generational income transfers are incurred, with heavier burdens levied on the working generations. In addition, the risk is that the government deficit will grow without control due to a substantial increase in social security payments. In Part I of this paper, we summarize the falling fertility rates and increased longevity rates, which are major factors underlying the rapid aging of Japan’s population, and their macroeconomic and fiscal implications. In Part II, we forecast labor market and macroeconomic projections up to the year 2050. We then go on to discuss the fiscal impacts of an aging population -focusing on public pensions -and examine possibilities for reducing the excessive burden of the working generations in their support of the elderly. Our econometric projections, which explicitly analyze the interaction between the public sector strategies and the economy, clearly indicate the vulnerability of the current system to the pressure from demographic developments. To put the fiscal position on a sustainable path and to contain a substantial rise in taxes and contributions, the social security system needs additional adjustments. Table of