Demographics and the Natural Rate of Interest in Japan

February 15, 2019

Preview Citation

Format: Chicago

Fei Han. Demographics and the Natural Rate of Interest in Japan, (USA: International Monetary Fund, 2019) accessed December 21, 2024

Disclaimer: 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.

Summary

Japan’s aging and shrinking population could lower the natural rate of interest and, together with low inflation expectations, challenge the Bank of Japan’s efforts to reflate the economy. This paper uses a semi-structural model to estimate the impact of demographics on the natural rate in Japan. We find that demographic change has a significantly negative impact on the natural rate by lowering trend potential growth. We also find that the negative impact has been increasing over time amid stronger demographic headwinds. These findings highlight the importance of boosting potential growth to offset the negative demographic impact and lift the natural rate in Japan.

Subject: Demographic change, Financial services, National accounts, Population and demographics, Population growth, Potential output, Production, Real interest rates, Return on investment

Keywords: Baseline estimate, Core inflation, Demographic change, Global, Inflation expectation, Interest rate gap, Japan, Monetary policy, Natural rate, Natural rate of interest, Population growth, Potential output, Rate of interest, Real interest rate, Real interest rates, Return on investment, WP

Publication Details

Pages:

31
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/031
Stock No:

WPIEA2019031
ISBN:

9781484396230
ISSN:

1018-5941

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