Fiscal Sustainability in Japan
14 Pages Posted: 15 Jun 2016
Date Written: May 1, 2016
Japanese government debt is at unprecedented levels with a gross debt to GDP ratio of over 230% and a net debt to GDP ratio of 150%. There are three big challenges to fiscal sustainability: the huge government bonds outstanding; continued budget deficits; and the growing age-related spending. The debt is sustainable as long as the market as a whole believes it is. The path to fiscal consolidation requires increasing the tax rate, reducing spending, broadening the tax base and growing the economy out of trouble. The longer the delay before moving to a more sustainable consolidation path, the larger the risks and closer Japan moves towards a financial crisis. The policy goal is to keep government debt sustainable, not to repay it all. Just as Japan has done since the burst of the asset bubble in the early 1990s there is every likelihood that the Japanese economy will muddle through.
Keywords: Japanese government debt; fiscal sustainability; debt to GDP ratio; fiscal consolidation
JEL Classification: E31, E61, E66
Suggested Citation: Suggested Citation