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Macroeconomic Effects of Japan’s Demographics: Can Structural Reforms Reverse Them?

Mariana Colacelli and Emilio Fernández Corugedo

No 18/248, IMF Working Papers from International Monetary Fund

Abstract: Yes, partly. This paper studies the potential role of structural reforms in improving Japan’s outlook using the IMF’s Global Integrated Monetary and Fiscal Model (GIMF) with newly-added demographic features. Implementation of a not-fully-believed path of structural reforms can significantly offset the adverse effect of Japan’s demographic headwinds — a declining and ageing population — on real GDP (by about 15 percent in the next 40 years), but would not boost inflation or contribute substantially to stabilizing public debt. Alternatively, implementation of a fully-credible structural reform program can contribute significantly to stabilizing public debt because of the resulting increase in inflation towards the Bank of Japan’s target, while achieving the same positive long-run effects on real GDP. If no reforms are implemented, severe demographic headwinds are expected to reduce Japan’s real GDP by over 25 percent in the next 40 years.

Keywords: Fiscal reforms; Demographic indicators; Labor market reforms; Product markets; Corporate sector; International trade; Public debt; Gross domestic product; Structural reforms, demographics, OLG models, Forecasting and Simulation, General, General, Contracts: Specific Human Capital, Matching Models, Efficiency Wage Models, and Internal Labor Markets (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-dem, nep-dge, nep-mac and nep-sea
Date: 2018-11-28
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