Japan faces rapid population aging, persistently low fertility, and an exceptionally high level of public debt. This paper surveys macroeconomic research linking demographic change and fiscal sustainability in Japan, focusing on the dynamics of government expenditures and revenues through the transformation of the fiscal system and the labor market. Since the 2000s, the main source of fiscal pressure has shifted to the expansion of age-dependent social insurance expenditures, including public pensions, health insurance, and long-term care, and we survey studies analyzing the roles of these policies. We also explore fiscal sustainability through labor market adjustments, focusing on research on elderly and female labor force participation, immigration, intra-household decision making, and family formation, based on empirical evidence and structural life-cycle and overlapping generations models. Fiscal outcomes are shown to depend on household responses to policy, and the literature emphasizes that stabilizing Japan’s long-run fiscal trajectory requires comprehensive reforms.
Kitao et al. (Wed,) studied this question.
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