Macroeconomic Effects of Japan’s Demographics: Can Structural Reforms Reverse Them?
IMF Working Papers, November 28, 2018
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Bibliographic details
- Authors: Mariana Colacelli, Emilio Fernández Corugedo
- Published: November 28, 2018
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484384732.001
Summary
- Yes, partly. This paper studies the potential role of structural reforms in improving Japan’s outlook using the IMF’s Global Integrated Monetary and Fiscal Model (GIMF) with newly-added demographic features.
- Implementation of a not-fully-believed path of structural reforms can significantly offset the adverse effect of Japan’s demographic headwinds — a declining and ageing population — on real GDP (by about 15 percent in the next 40 years), but would not boost inflation or contribute substantially to stabilizing public debt.
- Implementation of a fully-credible structural reform program can contribute significantly to stabilizing public debt because of the resulting increase in inflation towards the Bank of Japan’s target, while achieving the same positive long-run effects on real GDP.
- If no reforms are implemented, severe demographic headwinds are expected to reduce Japan’s real GDP by over 25 percent in the next 40 years.
Key findings
- Real GDP effects:
- Not-fully-believed structural reforms: offset adverse demographic effect on real GDP by about 15 percent in the next 40 years.
- No reforms: real GDP reduced by over 25 percent in the next 40 years.
- Inflation and public debt:
- Not-fully-believed reforms: would not boost inflation or contribute substantially to stabilizing public debt.
- Fully-credible reforms: can contribute significantly to stabilizing public debt via increased inflation towards the Bank of Japan’s target.
- Model usage:
- Analysis conducted with the IMF’s Global Integrated Monetary and Fiscal Model (GIMF) with newly-added demographic features.
Scenarios and projections
- Scenario A — Not-fully-believed structural reforms:
- Outcome: Real GDP loss from demographics largely offset (by about 15 percent over 40 years).
- Inflation: No material boost.
- Public debt: Little contribution to stabilization.
- Scenario B — Fully-credible structural reforms:
- Outcome: Same positive long-run effects on real GDP as Scenario A.
- Inflation: Increase towards the Bank of Japan’s target.
- Public debt: Significant contribution to stabilization.
- Scenario C — No reforms:
- Outcome: Severe demographic headwinds reduce real GDP by over 25 percent in the next 40 years.
Policy implications and recommendations
- Structural reforms can materially ameliorate long-run GDP losses from a declining and ageing population, but credibility matters:
- Not-fully-believed reforms help GDP but are insufficient to raise inflation or stabilize public debt materially.
- Fully-credible reforms are needed to trigger inflation dynamics that assist public debt stabilization.
- Combining structural reforms with credible monetary policy aiming at the Bank of Japan’s inflation target can enhance debt-stabilizing effects.
- Policy design should account for demographic trends (declining and ageing population) as a core driver of long-term macro outcomes.
Source: IMF Working Paper by Mariana Colacelli and Emilio Fernández Corugedo (November 28, 2018).