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2017 Vol.3
Japan’s Current Fiscal Situation and Medium- and Long-Term Issues

2017/07/27

While the deficit in Japan’s primary balance is shrinking as its economy recovers, the fact that the country has a deficit remains unchanged, and its debt continues to rise. Japan’s worsening fiscal situation can be attributed to structural factors such as increased social security expenditures resulting from an aging population, increased expenditures due to supplementary budgets, and a low tax burden ratio relative to those of other countries. As Japan’s population ages, its social security expenditures are expected to keep rising, mainly in the area of medical and nursing care. At the same time, the number of people aged 20 to 64 years, who mostly pay social security contributions, continues to decline, making it difficult for the government to secure the financial resources needed for the benefits. Therefore, the use of public funds for social security may increase further. There is also a possibility that Japan’s potential growth rate will fall in the medium to long run due to the country’s contracting and aging population, and consequently that tax revenues will not increase as anticipated. For these reasons, Japan’s fiscal environment is expected to become more severe. According to the Cabinet Office’s estimates, if Japan’s economic growth rate stays at its current potential, the country’s primary balance is expected to worsen beginning from 2020. Facing such a situation, the government cannot avoid further increases in the consumption tax, aimed at improving the fiscal balance; however, it will take time to implement such increases. Therefore, the challenge at the moment is to curb increases in expenditures. To this end, thoughtless increases in expenditures through supplementary budgets should be avoided. Also, as Japan’s population ages, there is a limit in terms of sustainability to income redistributions that rely on intergenerational income transfer. We will have to review how to redistribute income from the standpoint of sustainability of the fiscal balance and social security.

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