Demographic change, government debt and fiscal sustainability in Japan: The impact of bond purchases by the Bank of Japan

Abstract

We reconsider the fiscal consequences of an aging population in Japan that were reported in Hansen and İmrohoroğlu (2016). That paper predicted that the net debt to GNP ratio would reach 250 percent in 2021, while the actual net debt to GNP ratio was roughly constant at about 120% from 2011 to 2019. Here we study the role played by higher tax revenues, lower spending, and lower interest rates than were assumed in the previous paper. Most importantly, we consider the role played by Japanese government bonds held by the Bank of Japan in enabling this period of debt stability. We conclude that the stable net debt to output ratio is predicted to be temporary and reach 250 percent before 2040.