Fiscal Sustainability in Japan

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

Armstrong, Shiro Patrick and Okimoto, Tatsuyoshi, Fiscal Sustainability in Japan (May 1, 2016). AJRC Working Paper No. 2, May 2016. Australia-Japan Research Centre, Crawford School of Public Policy, The Australian National University, Available at SSRN: https://ssrn.com/abstract=2795327 or http://dx.doi.org/10.2139/ssrn.2795327