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  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

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©2022 International Monetary Fund

WP/22/164

IMF Working Paper

Asia and Pacific Department and Fiscal Affairs Department

The Fiscal Stance in Japan

A Model-based Analysis

Prepared by Jean-Marc Fournier, Takuma Hisanaga, and Anh Dinh Minh Nguyen*

Authorized for distribution by Ranil Salgado and Paulo Medas

August 2022

IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

ABSTRACT: This paper assesses Japan’s fiscal stance in the past and the future with a stochastic structural model called the Buffer-Stock Model of the Government. Our retrospective analysis suggests that the fiscal stance in the 1990s and the early 2000s was overall looser than the model recommendations. As for the future, the model advises the near-term fiscal policy to be supportive with a view to narrowing the output gap and minimizing hysteresis, while recommending a fiscal consolidation over the medium-term at a gradual pace.

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Title Page

WORKING PAPERS

The Fiscal Stance in Japan

A Model-based Analysis

Prepared by Jean-Marc Fournier, Takuma Hisanaga, and Anh Dinh Minh Nguyen

Contents

  • 1. Introduction

  • 2. The Buffer-Stock Model of the Government

    • A. The Concept

    • B. The Structure

    • C. Calibration to Japan

  • 3. Japan’s Fiscal Policy since 1990

    • A. Overview

    • B. A Model Assessment

    • C. Demographic Challenge

    • D. Japan’s Fiscal Policy during the Pandemic, and beyond

  • 4. Post-pandemic Fiscal Policy Path

    • A. Baseline Model Advice

    • B. Sensitivity Analysis

    • C. Scenario Analyses for Near-term Fiscal Policy

    • D. Pace of Medium-term Fiscal Consolidation

  • 5. Conclusions

  • Appendix I. Methodological Note on Decomposition of Debt Accumulation

  • References

  • FIGURES

  • Figure 1. Interest Rate-Growth Differential

  • Figure 2. Expenditures, Revenues, and Primary Balance

  • Figure 3. Structural Primary Balance: Observed vs. Model Recommendations

  • Figure 4. Structural Primary Balance: Observed vs. Model Recommendations with Real-time Output Gap Measures

  • Figure 5. Social Security Benefits

  • Figure 6. Contribution to Changes in Gross Public Debt

  • Figure 7. Structural Primary Balance and Debt Under the Baseline

  • Figure 8. Recommended Structural Primary Balance in 2022

  • Figure 9. Structural Primary Balance and Debt under Different Recovery Scenarios

  • Figure 10. Structural Primary Balance and Debt under Alternative r-g Scenarios

  • TABLES

  • Table 1. Baseline Calibration

  • Table 2. Regression Results

  • Table 3. Cumulative Contribution to changes

  • Table A.1. Benchmark for Each Spending and Revenue Component

*

Takuma Hisanaga worked at the International Monetary Fund when this paper was written. The authors would like to thank the IMF Japan team, and the Japanese Ministry of Finance officials who participated in our presentation during the 2022 Article IV Consultation for helpful comments and advice. We thank Nadine Dubost for editorial assistance.

The Fiscal Stance in Japan: A Model-based Analysis
Author: Jean-Marc Fournier, Takuma Hisanaga, and Anh D. M. Nguyen