Strategies for Fiscal Consolidation in Japan

24 Pages Posted: 4 Mar 2007

See all articles by Dennis P. J. Botman

Dennis P. J. Botman

International Monetary Fund (IMF) - Fiscal Affairs Department

Hali J. Edison

International Monetary Fund (IMF) - Research Department

Papa N'Diaye

International Monetary Fund (IMF) - Asia and Pacific Department

Date Written: February 2007

Abstract

Japan's key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF's Global Fiscal Model. The results suggest that: (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures' (ii) achieving primary balance is not sufficient to stabilize the net debt ratio' (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies' (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation' and (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.

Keywords: Fiscal policy, Japan, Tax reforms, Aging, Adjustment policy, Debt sustainability analysis, Public finance, Economic models

JEL Classification: E62, F47, H20, H30, H63

Suggested Citation

Botman, Dennis P. J. and Edison, Hali J. and N'Diaye, Papa, Strategies for Fiscal Consolidation in Japan (February 2007). IMF Working Paper No. 07/37, Available at SSRN: https://ssrn.com/abstract=967878

Dennis P. J. Botman

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

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

Hali J. Edison

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

700 19th Street NW
Washington, DC 20431
United States
202-623-6946 (Phone)
202-589-6946 (Fax)

Papa N'Diaye (Contact Author)

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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