Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model

Ichiro Muto, Takemasa Oda and Nao Sudo
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Takemasa Oda: Bank of Japan

No 12-E-9, Bank of Japan Working Paper Series from Bank of Japan

Abstract: Due to a sharp decline in the fertility rate and a rapid increase in longevity, Japan's population aging is the furthest advanced in the world. In this study we explore the macroeconomic impact of population aging using a full-fledged overlapping generations model. Our model replicates well the time paths of Japan's macroeconomic variables from the 1980s to the 2000s and yields future paths for these variables over a long horizon. We find that Japan's population aging as a whole adversely affects GNP growth by dampening factor inputs. It also negatively impacts on GNP per capita, especially in the future, mainly due to the decline in the fraction of the population of working-age. For these findings, fertility rate decline plays a dominant role as it reduces both labor force and saver populations. The effects of increased longevity are expansionary, but relatively minor. Our simulations predict that the adverse effects will expand during the next few decades. In addition to closed economy simulations, we examine the consequences of population aging in a small open economy setting. In this case a decline in the domestic capital return encourages investment in foreign capital, mitigating the adverse effects of population aging on GNP.

Keywords: Population Aging; Overlapping Generations Model; Capital Flow (search for similar items in EconPapers)
JEL-codes: E20 J11 (search for similar items in EconPapers)
Date: 2012-11-05
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Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model (2016)
Working Paper: Macroeconomic Impact of Population Aging in Japan: A Perspective from an Overlapping Generations Model (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:12-e-9

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