Strategies for Fiscal Consolidation in Japan

By Dennis P Botman, Papa M N'Diaye, Hali J Edison

February 1, 2007

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Dennis P Botman, Papa M N'Diaye, and Hali J Edison. Strategies for Fiscal Consolidation in Japan, (USA: International Monetary Fund, 2007) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Japan's key fiscal challenge is to put public finances on a more sustainable footing. This paper investigates the macroeconomic implications of alternative fiscal strategies for Japan using the IMF's Global Fiscal Model. The results suggest that: (i) an adjustment package that achieves primary balance through lower social transfers and government spending and a higher VAT is the most viable option and has a smaller negative impact on growth than other fiscal measures; (ii) achieving primary balance is not sufficient to stabilize the net debt ratio; (iii) prefunding future aging costs provides greater long-term benefits compared with less front-loaded strategies; (iv) tax reform involving shifting from corporate taxation to consumption taxation could mitigate the short-term output losses associated with fiscal consolidation; and (v) the spillovers to the rest of the world from consolidation in Japan are positive in the medium term, but modest.

Subject: Consumption, Consumption taxes, Corporate income tax, Expenditure, Personal income tax

Keywords: Consumer, Debt ratio, GDP, Interest rate, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/037
Stock No:

WPIEA2007037
ISBN:

9781451866018
ISSN:

1018-5941

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