Demographics and the Natural Rate of Interest in Japan

32 Pages Posted: 8 Apr 2019

See all articles by Fei Han

Fei Han

International Monetary Fund (IMF)

Date Written: February 2019


Japan's aging and shrinking population could lower the natural rate of interest and, together with low inflation expectations, challenge the Bank of Japan's efforts to reflate the economy. This paper uses a semi-structural model to estimate the impact of demographics on the natural rate in Japan. We find that demographic change has a significantly negative impact on the natural rate by lowering trend potential growth. We also find that the negative impact has been increasing over time amid stronger demographic headwinds. These findings highlight the importance of boosting potential growth to offset the negative demographic impact and lift the natural rate in Japan.

Keywords: Real interest rates, Negative interest rates, Interest rate policy, Economic growth, Interest rate increases, Demographic change, natural rate of interest, monetary policy, Japan, natural rate, Turunen, potential growth, Pescatori, real interest rate

JEL Classification: C11, C32, E43, E52, E01, G21, E2, O4

Suggested Citation

Han, Fei, Demographics and the Natural Rate of Interest in Japan (February 2019). IMF Working Paper No. 19/31, Available at SSRN:

Fei Han (Contact Author)

International Monetary Fund (IMF) ( email )

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

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