Japan's Challenging Debt Dynamics

This working paper presents the background and the details of the simulations behind Box 1.4 of theMay 2013 OECD Economic Outlook. A small simulation model is used to evaluate the contribution thatthe three pillars of the government’s strategy – fiscal consolidation, growth-boosting structural reforms andhigher inflation – could make to reversing the rise in Japan’s public debt ratio, currently about 230% ofGDP. The findings indicate that fiscal consolidation amounting to around 10 percentage points of GDP isnecessary by 2020 to eliminate the primary deficit, as targeted in the current medium-term fiscal strategy.With moderately higher growth coming from increased female labour force participation and higherproductivity growth, as well as inflation gradually rising to 2% thanks to unconventional monetary policymeasures, the debt ratio would likely be put on a resolute downward trajectory by the end of this decade,although it is likely to remain around 200% of GDP in 2035.