Is Japan's Population Aging Deflationary?

24 Pages Posted: 27 Aug 2014

See all articles by Derek Anderson

Derek Anderson

International Monetary Fund (IMF)

Dennis P. J. Botman

International Monetary Fund (IMF) - Fiscal Affairs Department

Ben Hunt

International Monetary Fund (IMF) - Research Department

Date Written: August 2014

Abstract

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.

Keywords: Aging, Japan, Deflation, Inflation, Age-related spending, Health care spending, Fiscal policy, Monetary policy, Demographic transition, Population aging, Abenomics, real interest rate, aggregate demand, central bank, relative prices, monetary fund, inflation dynamics, monetary policy reaction function, inflation target, real interest rates, rate of inflation, low inflation, long-term interest rates, monetary model, inflation rate, percent inflation, lower inflation, inflationary pressures, price level, high inflation, inflation targeting, rising inflation, macroeconomic performance, real wages, relative price, monetary policy rule, rise in inflation

JEL Classification: E27, J11

Suggested Citation

Anderson, Derek and Botman, Dennis P. J. and Hunt, Benjamin, Is Japan's Population Aging Deflationary? (August 2014). IMF Working Paper No. 14/139, Available at SSRN: https://ssrn.com/abstract=2487897

Derek Anderson (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Dennis P. J. Botman

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Benjamin Hunt

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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