Japan's Fiscal Situation: Warning of a 'Crocodile's Mouth', Calls to Redefine 'Elderly' Grow Louder

Japan's fiscal situation is among the most severe in the world, and despite arguments that national finances differ from household finances, experts are expressing concerns.

Nihon.com recently conducted an interview with Koji Yano, former Vice Minister of Finance and currently a specially appointed professor at Kanagawa University, and released an in-depth analysis of Japan's fiscal situation. Yano is known as a fiscal disciplinarian even within the Ministry of Finance, and he has never hesitated to criticize key figures across different administrations. In an October 2021 article for the monthly magazine Bungei Shunju, he warned that "if the current situation continues, national finances will collapse." He also criticized the policy debates during the Liberal Democratic Party's presidential election and the House of Representatives election as "baramaki gassen (money-scattering competition)." He described Japan's fiscal situation as "like the Titanic rushing towards an iceberg," emphasizing the fiscal crisis.

Yano further likened Japan's fiscal situation to the "mouth of a crocodile" and continued his criticism of the half-century-long fiscal deficit and the optimistic view that "economic stimulus will increase tax revenue and improve finances." He pointed out that social security spending increases by 800 billion yen annually amid a declining population, while tax revenue growth is slow due to a decrease in the working-age population.

While acknowledging that major disasters and the COVID-19 pandemic have impacted the deterioration of finances, Yano emphasized the need to analyze the fundamental long-term issues of the fiscal situation beyond these factors. He used the example of Ninomiya Sontoku, an agricultural economist in the late Edo period, who analyzed the finances of various Han (domains) going back 100 years, despite numerous disasters and economic fluctuations.

Yano highlighted that Japan's national debt-to-GDP ratio ranks last among 180 countries worldwide and has consistently increased or remained at a minimal increase over the past 30 years.

In this context, Yano argued for "re-examining the definition of the elderly," suggesting a redefinition of the scope of "elderly persons" and a review of the social security system. This has emerged as a heated topic of debate in Japanese society as a potential solution to the surging social security costs associated with an aging society.

Meanwhile, the National Institute of Population and Social Security Research (NIRA) analyzed in its report titled "Long-Term Outlook for the Japanese Economy and Finances Under a Declining Population – Painting a Picture of Households in 2060" that the continued low growth of the Japanese economy and the expansion of social security spending due to aging are causing concerns about the future of the Japanese economy. Assuming that the government and the Bank of Japan's policies remain unchanged, NIRA projected that national debt will continue to increase until 2060.

However, NIRA also offered a positive outlook.

NIRA analyzed that a 0.12% tax increase until 2060 could achieve a primary balance (PB) surplus. This means that if every household shoulders an equal burden annually, working-class households can expect a monthly increase of 28,000 yen in 2060, and elderly households can expect a monthly increase of 20,000 yen.

NIRA mentioned the following risk factors that Japan's fiscal situation may face in the future: ① the possibility of a continued PB deficit, ② the possibility that interest rates will remain lower than the growth rate, and ③ the possibility that interest rates will exceed the growth rate. Particularly for ③, they provided examples such as a return to low interest rates and deflation or a decline in government bond credit ratings due to rare events.

NIRA added that if the total factor productivity (TFP) growth rate could be increased by 0.5%, the total debt level in 2060 could be reduced by 19.3% in terms of GDP.

Concerns about the sustainability of Japan's fiscal situation are growing, and various challenges, including the advent of an aging society, soaring social security costs, and increasing national debt, remain as tasks that the Japanese government needs to address in the future.