Is Japan’s Population Aging Deflationary?

Author/Editor: Derek Anderson ; Dennis P. J. Botman ; Ben Hunt
Publication Date: August 04, 2014
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Japan has the most rapidly aging population in the world. This affects growth and fiscal sustainability, but the potential impact on inflation has been studied less. We use the IMF’s Global Integrated Fiscal and Monetary Model (GIMF) and find substantial deflationary pressures from aging, mainly from declining growth and falling land prices. Dissaving by the elderly makes matters worse as it leads to real exchange rate appreciation from the repatriation of foreign assets. The deflationary effects from aging are magnified by the large fiscal consolidation need. Many of these factors will beset other advanced countries as well, but we find that deflation risk from aging is not inevitable as ambitious structural reforms and an aggressive monetary policy reaction can provide the offset.
Series: Working Paper No. 14/139
Subject(s): Aging | Japan | Deflation | Inflation | Age-related spending | Health care spending | Fiscal policy | Monetary policy | Demographic transition

Publication Date: August 04, 2014
ISBN/ISSN: 9781498392129/1018-5941 Format: Paper
Stock No: WPIEA2014139 Pages: 23
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