Real Arai

A numerical analysis of Japan’s fiscal sustainability in a simple OLG model

We investigate the size of primary balance that can be sustained and the change in public debt and physical capital under transition dynamics in the Japanese economy. For our investigation, we construct a simple overlapping generations model. We find that a large primary surplus, 13.8–18.7% of GDP, is needed to prevent the public debt-to-GDP ratio from diverging infinitely. We also show that even if the large primary surplus can be maintained, the Japanese economy faces a sharp reduction in physical capital from 191 to 70.0% of GDP on the transition path.