NCPA - National Center for Policy Analysis


September 14, 2004

Critics say that Japan is heading towards catastrophe. National debt is high, deficits are higher, and the country will soon have a huge retired class without enough workers to fund their retirement. Is Japan doomed? The Federal Reserve Bank of New York claims that the times ahead will be tough, but manageable for Japan.

According to the bank, Japan's national debt is misleading:

  • The public sector's official gross liabilities is about 161 percent of gross domestic product (GDP).
  • However, this includes debt that the government owns -- debt with zero net liability.
  • After taking into account these intra-governmental claims, Japan has a debt load of 62 percent of GDP, lower than the Organization for Economic Cooperation and Development (OECD) average.

Moreover, says the FRB, public spending is not out of control:

  • Government outlays have risen as a share of GDP, but this is entirely accounted for by the growing number of Japanese aged 65 or over who receives transfer payments.
  • Public works spending may be excessive, but is no higher now, relative to GDP, than the 1980s.

Lastly, Japan's demographic problem will not be overwhelming. They have many years over which to spread the welfare costs of its temporary surge in elderly citizens. The authors estimate that tax rates need to rise from three to nine percentage points. Even under the worst economic situations, Japan's tax rates would have to rise to the typical European Union country in order for its debt to be sustainable.

Source: Christian Broda and David Weinstein, "Happy news from the dismal science: reassessing Japanese fiscal policy and sustainability," Federal Reserve Bank of New York, forthcoming; and "Grey hair, red ink, but blue skies?" Economist, June 26, 2004.

For Economist text


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