Demographic Challenges to Japan’s Fiscal Policy

Policy Research Institute Ministry of Finance, Japan

November 2016

Outline

Ⅰ. Introduction Ⅱ. Japan’s Fiscal Situation and Demographic Challenges Ⅲ. Some Lessons from Japan

1

・・・ 2

・・・ 7 ・・・14

Ⅰ． Introduction

3

0

10

20

30

40

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060

(%)

China

India

Indonesia

Japan

Korea

Philippines

Thailand

Viet Nam

7

14

Actual Projected

Population (million) / com

ponent ratio

(Note) “Aging rate” is referring to age 65 and older ratio to the total population. (Sources) Japan 1950-2010: “National Census” (Ministry of Internal Affairs and Communications) 2011-2050: “Japanese Future Demographic Projections” (National Institute of Population and Social Security Research) (January, 2012) Other countries: “World Population Prospects: the 2015 Revision” (United Nations)

0

5

10

15

20

25

30

35

40

1950 1970 2000 2030 2050

(%)

Japan：27.5

Germany：21.4

France：19.5

U.K.：18.0

U.S.：15.2

Japan

France U.K.

U.S.

2016

Actual Projected

(Note) When the proportion of population ages 65 and older exceeds 7%, that situation is labeled that the society is “aging” and when it exceeds14%, it is named as “aged” society. (Sources) United Nations, World Population Prospects: The 2015 Revision

Global Trends of Population Aging Population in Japan is aging rapidly. In 20 years, Korea will be the same level

of current Japan followed by Thailand and China. Comparison of European & the United States Comparison of Asian Countries

Germany

4

Population Aging of Asian Countries

(Note) Figure shows starting and ending year for transition from 7 percent (aging) to 14 percent (aged) of population ages 65 and older. Aging and aged thresholds are based on United Nations definitions. East Asia and Pacific economies rounded to five-year increments. (Sources) World Bank estimates based on data from UN 2013 and Kinsella and He 2009.

East Asian and Pacific economies are aging more quickly than past other economies.

Years to move from 7 to 14 percent population 65+, 5 year rounded

Japan(25)

5

Fiscal Situations in Asian Countries

Overall government debt positions of Asian countries appear strong.

（％）

（Note） Data is combined with Historical Public Debt Database and World Economic Outlook Database

（Sources） IMF

0

20

40

60

80

100

120

China

India

Indonesia

South Korea

Phillipines

Thailand

United States

Government Debt (% of GDP, 1960-2015) in Asian countries

6

Fiscal Situation in Japan, European and the U.S.

（Note） Data is combined with Historical Public Debt Database and World Economic Outlook Database

（Sources） IMF

The level of debt (% of GDP) in Japan is the same level as that of the U.K. in late 40s.

Japan has increased its debt since the collapse of the bubble economy in 90s.

0

50

100

150

200

250

300

1900

1903

1906

1909

1912

1915

1918

1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

Japan United States United Kingdom Germany France

Japan

United States

France

United Kingdom

Germany

（％） Government Debt (% of GDP, 1900-2015) in Japan, Europe and the U.S.

Ⅱ．Japan’s Fiscal Situation and Demographic Challenges

8

Japan’s Fiscal Situation (1)

(Note) FY1975-2014: Supplement, FY2015: Including Supplementary Budget, FY2016: Budget

（Sources） Ministry of Finance

2.1 3.5 4.5 4.3 6.3 7.2 5.9 7.0 6.7 6.4 6.0 5.0 2.5 1.0

0.2 0.8 2.0

9.2 8.5

16.9

24.3 21.9 20.9

25.8 28.7 26.8

23.5 21.1 19.3

26.2

36.9 34.7 34.4 36.0 33.8 31.9 29.9 28.4

3.2 3.7

5.0 6.3 7.1 7.0

7.0 7.0 6.8 6.4 6.3 6.2

6.9 6.2 6.4 6.3 6.7

9.5

16.2 12.3

16.4

10.7 9.9

17.0

13.2

11.1 9.1

9.1 6.7 8.7

7.8

6.4 6.0

7.0

15.0

7.6 8.4 11.4

7.0 6.6 6.5

6.1

13.8 15.7

17.3

21.9 23.7

26.9 29.0 30.5

32.4 34.9

38.2 41.9

46.8

50.8 54.9

60.1 59.8

54.4

54.1

51.0 51.9

52.1 53.9

49.4 47.2

50.7 47.9

43.8

43.3

45.6

49.1 49.1

51.0

44.3

38.7 41.5 42.8

43.9

47.0

54.0 56.4 57.6

20.9 24.5

29.1

34.1

38.8

43.4 46.9

47.2 50.6 51.5 53.0 53.6

57.7 61.5

65.9 69.3 70.5 70.5

75.1 73.6

75.9

78.8 78.5

84.4

89.0 89.3 84.8

83.7

82.4

84.9 85.5 81.4

81.8

84.7

101.0

95.3

100.7

97.1

100.2

98.8

99.7 96.7

5.3 7.2

9.6 10.7

13.5 14.2 12.9 14.0 13.5 12.8 12.3 11.3

9.4 7.2 6.6 6.3 6.7

9.5

16.2

13.2

18.4 19.9

18.5

34.0

37.5

33.0

30.0

35.0 35.3 35.5

31.3

27.5 25.4

33.2

52.0

42.3 42.8

47.5

40.9 38.5 36.4

34.4

0

20

40

60

80

100

120

75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

(trillion yen)

(FY)

Total Expenditures

Tax revenues

Construction Bond Issues

Special Deficit-Financing Bond Issues

Japan continues to run budget deficits where expenditure exceeds tax revenue.

Collapse of Bubble Economy

Global Financial Crisis

Trends in General Account Expenditures and Tax Revenues

11.1 14.1 18.8 16.6 19.7

32.7 1.5

3.5

12.7 20.7 24

24.3

18.8

21.6

16.0

23.0 17.7

16.1

17.4

17.6

15.9

10 13.3

6.2 51.2 43.2

36.6 29.7

25.3 20.7

0

20

40

60

80

100

1960 1970 1980 1990 2000 2015

others

Public Works

Local Allocation Tax Grants, etc.

National Debt Service

Social Security

9

Japan’s Fiscal Situation (2)

(Sources) Ministry of Finance

The ratios of Social Security and National Debt Service in General Account Expenditures have been growing.

(FY)

Breakdown of Trends in General Account Expenditures from 1960 to 2015

(%)

10

Japan’s Fiscal Situation (3)

(Note) The data of social security- related expenditures are from each year’s general account expenditures of national budget. The total social security expenditures of national budget in 2015 are about 30% of all social security benefits (basic pension, medical care, long-term care, etc.). (Sources) National Institute of Population and Social Security Research “Japanese Social Security Statistics Database,” Okawa and others “The long term economic statistics I National income”

10

FY 1972 1980 1990 2000 2010 2015

Total social security-related expenditure (¥)

1.6 trillion 8.2 trillion 11.6 trillion 16.8 trillion 27.2 trillion 31.5 trillion

Social security-related

expenditure to GDP ratio (%)

1.7 3.3 2.6 3.3 5.7 6.2

51.4 43.7 44.7

34.7 34.7 36.4

7.5 7.6 8.8

14.1 26.6 29.6 30.8 37.8 35.6

34.5 29.7 25.7 21.2 19.8 19.2

0

1

2

3

4

5

6

7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1972 1980 1990 2000 2010 2015

Welfare and Employment

National Pension

Long-term care insurance

Health insurance premium

Social security-relatedexpenditure to GDP ratio

(FY)

(% of GDP) 100

90

80

70

60

50

40

30

20

10

0

(%)

The ratios of health insurance premium and national pension in Social Security-related Expenditures (National Budget) are high.

Social security-related expenditures to GDP ratio (Right axis)

Trends and Breakdown in Social Security-related Expenditures (National Budget)

11

Demographic change in Japan (1)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060

Proportion of working-age population 50.9%

Proportion of population aged 65 and over 39.9%

Total fertility rate 1.35

Total fertility rate

Aged 15-64

Aged 14 and under

Aged 65 and over

1.39 (2010)

11,662

3,685

6,773

1,204

8,674

3,464

4,418

791

Population（ten thousand ）

Due to low fertility rate and increasing longevity, the population in Japan is aging and shrinking.

Projected (2012) Actual （National Census etc.）

(Note) Actual numbers above are those calculated as of October 1 of each year before 2010. （Sources） Ministry of Internal Affairs and Communication “National Census” and “Population Projection”, National Institute of Population and Social Security Research, “Japan’s Demographic Composition in the Future (estimation as of January 2012)”, Ministry of Health, Labor and Welfare “Vital Statistics”

Trends in Japan’s population Structure

12,806

12

(Note) 1945’s population pyramid based on East Asian age reckoning. Average age of 1945 is an estimated value. “Aging rate” is referring to age 65 and older ratio to the total population. (Sources) Ministry of Internal Affairs and Communications ″Population Projection”, National Institute of Population and Social Security Research, “Japan’s Demographic Composition in the Future” (estimation as of January 2014), UN “World Population Prospects 2015 revision”

age

65

20

(ten thousand )

The first baby boomers Age:96~98

The second baby boomers Age:71~74

Men Women

1945 After the WWⅡ

1973 The first year of high-level

social welfare

2015 Last year

2045 Near future

28 years 42 years 30 years

0 50 100 0501000

10

20

30

40

50

60

70

80

90

100

0 50 1000501000

10

20

30

40

50

60

70

80

0501000

10

20

30

40

50

60

70

80

0 50 100 0501000

10

20

30

40

50

60

70

80

90

100

0 50 100

The first baby boomers Age:24~26

The first baby boomers Age:66~68

The second baby boomers Age:41~44

Demographic change in Japan (2) The population composition of 1945 in Japan was similar to the current Myanmar.

The level of aging now is, and projected to be, unprecedented.

Men Women Men Women Men Women

Year 1945 1975 2015 2045 Average age 27.3 32.5 46.5 52.8 Aging rate 5.1% 7.5% 26.8% 37.7%

A similar country to Japan at that time Myanmar Brazil － －

0%

5%

10%

2020 2030 2040 2050 2060

10.31%～11.00%

9.73%～9.91%

6.01%～6.11%

10

5

0

13

Projection of “Age-Related Spending” in Japan “Age-related spending” is expected to rise further.

20%

25%

30%

35%

40%

2020 2030 2040 2050 2060

39.90%

29.1% 29.75%～30.78%

35

20

“Age-related spending”

Aging rate

Change in aging rate and “age-related spending”

Public pension

Health care

Long-term care

Change in each break down items

2.45%

7.30%

9.93%

23.65%

( % of GDP) (% of GDP)

(FY) (FY) (Notes) 1. It followed the method of European Commission (2012). The projection of “age-related spending” made under the current systems in Japan. 2. “Age-related spending”: Spending where per person expenditure is different by age, including for social security benefits (pension, health care, long-term care) and for education and others. 3. It estimated based on ”Required size of the required fiscal adjustment for Japan’s fiscal management -Projected by referring to quantitative analysis pertaining to dynamic fiscal imbalance”, Ueda, Yoneda, Ota （2014） 4. The numerical values are for the case of using economic precondition of scenario A~E based on “Actuarial Valuation of Public Pension Plans” (June, 2014)

after 2024.

40

30

25

(Sources) Ministry of Finance

Ⅲ. Some Lessons from Japan

15

Increase in Social Security Benefits and the demographic transition in Japan

(Note) Social security benefits include medical care, long-term care and basic pension (excl. individual payments in the medical and the long-term care). They are financed by social insurance premiums as well as the tax revenue of central and local governments. The total social security benefits in 2015 were about ¥116.8 trillion. (Sources) Ministry of Internal Affairs and Communications ″Population Projection”, “Labour Force Survey”, Ministry of Health, Labour and Welfare “Abridged Life Table”, ‘‘Vital Statistics’’

With the rapid progress of aging population, social security benefits have been increased.

Establish of universal health insurance and

universal pension coverage (1961)

First year of high-level

social welfare (1973)

Establish of health services scheme for

the aged (1983)

Establish of public long-term care insurance

system (2000）

Establish of latter-stage elderly

healthcare system （2008）

1950 55 60 65 70 75 80 85 90 95 2000 05 10 15 (FY)

(% of GDP)

Year 1960 1970 1980 1990 2000 2010 2015

Topics, etc.

Establish of universal health insurance and

universal pension coverage

First year of high-level social

welfare

Establish of health services scheme for the

aged

The bubble economy period

Establish of public long-term care

insurance system

Establish of latter-stage elderly healthcare

system

Last year

Life expectancy (Men) 65.3 69.3 73.4 75.9 77.7 79.6 80.8

Life expectancy (Women) 70.2 74.7 78.8 81.9 84.6 86.3 87.1 Aging rate 5.7 7.1 9.1 12.1 17.4 23.0 26.7

Total fertility rate 2.0 2.13 1.75 1.54 1.36 1.39 1.46

Social Security Benefits to GDP Ratio

1

1.2

1.4

1.6

1.8

2

2.2

2.4

69 74 79 84 89 94 99 4 9 14

16

Transition of the total fertility rate

(Sources) National Institute of Population and Social Security Research “Population Projections for Japan 2011-2060”, Institute of Population Problems “Future Population Estimates for Japan –by Sex and Age, 1970～2050-” Ministry of Internal Affairs and Communications “Population Projection”

Projections(as of 1969) Projections(as of 1986)

“A social security system should be designed based on the long-term projections.” （Fiscal System Council（Nov. 28, 1968）） However , there were great differences between actual results and projections.

Socio-Economic Projections and Actual Results in Japan

Transition of the aging rate

＜Projections (as of 1969)＞ ＜Actual value＞ Since 1973 1973～1988 6.2％ 6.9％ (average) ＜Projections (as of 1990)＞ Since 1990 1990～2014 5.5％ 3.7％ (average)

(Sources) Ministry of Health, Labour and Welfare “Future Population Estimates for Japan by Sex and Age, Estimated in August 1969”, ‘‘Vital Statistics’’, Institute of Population Problems “Population Projections for Japan: 1985-2085”

(Sources) Ministry of Health, Labour and Welfare ‘‘actuarial review’’

(%)

Investment yield of public pension

(FY)

0

10

20

30

40

50

1970 80 90 2000 10 20 30 40 50

Actual value

Projections(as of 2012)

Projections(as of 1975)

(%)

(FY)

Actual value

Hypothetical Projection Error of Health-Care Expenditures in Japan

17

The long-term projection of health-care expenditure could have been underestimated considerably.

PRI’s hypothetical projection of the health-care expenditure from 1989 shows that the actual health-care expenditure could overwhelm its projection by as much as 2% (in GDP ratio) toward 2013. This is mainly because per-capita health care expenditure has grown much faster than the economic growth for both the aged people and the others (c.f. advanced and costly medical care). *See notes below for the definition of the aged people.

Health-Care Expenditure Per-capita health care expenditure

(Notes) 1.The per-capita health care expenditure is forecast according to actual per-capita GDP growth. The projection gap in the health care expenditure reflects the projection error not only in the per-capita expenditure but also in demographic changes. 2. The definition of the aged people is based on “health care system for the aged (Roujin-hoken seido)” until 2007 and “long-life medical care system (kouki-koureisha-iryo seido)” thereafter. The former system basically covers people at 70 or above, which is gradually narrowed to 75 or above from 2002 to 2007, while the latter system basically covers people at 75 or above. The projection for the aged people also reflects the change in the age classification. The health-care expenditure for the others covers all the expenditures excluding the expenditure for the aged.

(10 thousands yen) (% to GDP)

The aged people: 70+

The aged people: 75+

70+ to 75+

(FY) (FY)

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