The impact of demographic change on the natural rate of interest in Japan

Abstract

This paper develops a semi-structural model to estimate the impact of demographic changes on the natural rate of interest in Japan. We find that demographic changes have a significantly negative impact on the natural rate by lowering the trend potential growth. We also find that the negative impact has increased over time amid stronger demographic headwinds. A lower natural rate of interest could challenge the Bank of Japan’s efforts to reflate the economy. These findings call for measures to boost Japan’s potential growth to offset the negative demographic impact and lift the natural rate of interest.