R. Anton Braun and Douglas H. Joines
Working Paper 2014-18
November 2014

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Japan is in the midst of a demographic transition that is both rapid and large by international standards. As recently as 1990, Japan had the youngest population among the Group of 6 large, developed countries. However, the combined effects of aging of the baby boomer generation and low fertility rates have produced very rapid aging. Japan now finds itself with the oldest population among the Group of 6, and its population will continue to age at a rapid pace in future years. Aging is already placing a burden on government finances, and Japan's ability to confront the negative fiscal implications of future aging is constrained by its very high debt-to-GDP ratio. We find that Japan faces a severe fiscal crisis if remedial action is not undertaken soon, and we analyze alternative strategies for correcting Japan's fiscal imbalances.

JEL classification: E62, H51, H55, H63

Key words: Japan, fiscal policy, aging, government

The authors thank seminar participants from the Canon Institute for Global Studies, the National Graduate Institute for Policy Studies (GRIPS), Hitotsubashi University, the workshop at the University of Michigan Retirement Research Center, and the University of Tokyo for their helpful comments. Joines acknowledges financial support from the Japan Foundation and the Social Science Research Council under an Abe Fellowship. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to R. Anton Braun, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8708, r.anton.braun@gmail.com, or Douglas H. Joines, USC Marshall School of Business, University of Southern California, Los Angeles, CA 90089-0808, 213-740-6510, joines@marshall.usc.edu.