June 10th, 2015 Ministry of Finance

Fiscal Policy in Japan - Issues and Future Directions-

-15.0

-10.0

-5.0

0.0

5.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(%)

General Government Gross Debt and Financial Balances (International Comparison)

General Government Gross Debt General Government Financial Balances

0

30

60

90

120

150

180

210

240

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

(%)

(Source) Based on the data included in “Economic Outlook 96” issued by the OECD in November 2014, and not reflecting the data for the budget for FY2015 (Note) Figures represent the general government-based data (including the central/local governments and the social security funds).

Japan

Italy

U.S.

U.K.

France

Germany

Canada Japan

Italy

U.S.

U.K.

France

Germany

Canada

(CY) (CY)

1

Lehman Shock

Lehman Shock

Austria

Belgium

Canada

Czech Republic

Denmark

Estonia

Finland France

Germany Greece

Hungary

Iceland

Ireland

Israel

Italy

Japan

Korea

Luxembourg

Netherlands

New Zealand

Norway

Poland

Portugal

Slovak Republic

Slovenia

Spain

Sweden

Switzerland

United Kingdom

United States

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

20.0 30.0 40.0 50.0

Relationship between Social Security Expenditures and the Tax and Social Security Contributions Ratio in Major Advanced Countries

(Source) Tax and Social Security Contributions Ratio: OECD “National Accounts”, “Revenue Statistics”, Cabinet Office “National Accounts” etc. Social Security Expenditure: OECD “Stat Extracts National Accounts”. (Note 1) The figures represent the general government-based data (including the central and local governments and the social security funds). (Note 2) National Burden Ratio : For other countries, the figures are actual for 2011. For Japan, the figure for FY2011 is actual. For New Zealand, the figure for 2005 is actual. For Canada, the figure for 2006 is actual. (Note 3) Social Security Expenditure : For other countries, the figures for 2011 are actual. For Japan, the figure for FY2011 is actual. For New Zealand, the figure for 2005 is actual. For Canada, the figure for 2006 is actual.

Gove

rnm

ent S

ocia

l Sec

urity

Exp

endi

ture

(as

per

cent

age

of G

DP)

Tax and Social Security Contributions Ratio (as percentage of GDP)

2

Projection (2012) （Japan’s Demographic Composition in the Future ）

Actual results （National Census etc.） Population（ten thousand ）

Proportion of working-age population 50.9%

Proportion of population aged 65 and over 39.9%

Total fertility rate 1.35

Proportion of working-age population (aged 15-64)

Proportion of population aged 65 and over

Total fertility rate

Aged 15-64

Aged 14 and under

Aged 65 and over

63.8% (2010)

1.39 (2010)

12,806

11,662

3,685

6,773

1,204

8,674

3,464

4,418

791

（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” 3

Trends in Japan’s Population Structure

23.0% (2010)

3,602

(36.6%) 3,249

(26.3%) 2,601

(20.5%) 2,204

(17.4%) 1,849

(15.3%) 1,297

(13.4%)

5,608

(57.1%)

7,622

(61.7%) 7,888

(62.1%) 7,183

(56.6%) 6,559

(54.4%)

4,643

(47.8%)

618

(6.3%)

1,489

(12.0%)

2,204

(17.4%) 3,308

(26.1%)

3,657

(30.3%)

3,768

(38.8%)

1965 1990 2000 2014 2025 2050

Age 65 and over

Age 20-64

Age 19 and under

Total population

9,828

Total population

12,361

Total population

12,695 Total

population 12,066

Total population

9,708

Total population

12,693

＜Ratio of People Older than 65 years to the Total Population＞ ＜Japan’s demographic composition＞

4

Population (thousand) / component ratio

(Source) Demographic composition from 1965 to 1990 according to the “National population census” conducted by the Ministry of Internal Affairs and Communications, and data for 2014 onwards according to “Japan’s demographic composition in the future (estimation as of January 2012)” issued by the National Institute of Population and Social Security Research.

Demographic Change

0

5

10

15

20

25

30

35

40

1950 1970 2000 2030 2050

(%)

Japan: 26.8

Germany: 21.4

France: 18.7

United Kingdom: 18.1

United States: 14.7

1970 (S45)

2015 (H27)

2025 (H37)

2040 (H52)

Japan 7.1 26.8 30.3 36.1

Germany 13.6 21.4 25.1 31.8

France 12.9 18.7 21.7 25.4

U.K. 13.0 18.1 20.0 24.0

U.S. 9.8 14.7 18.6 21.2

(Source) 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 2012 Revision” (United Nations)

2015

Long-term Projections on Japanese Public Finances (Fiscal System Council, April 28)

<Projection Methodologies and Objectives>

Following the projection methodologies by the European Commission, we analyze i) the impact of demographic changes on ”age-related expenditure” , and ii) the required fiscal adjustment (Sustainability Gap Indicators : S1 and S2) to maintain fiscal sustainability in the long term.

(Note 1) In the “Fiscal Sustainability Report 2012” by the EC, the sustainability gap indicators, S1 and S2, are calculated against the baseline (assuming unchanged policies).

・S1 : The fiscal adjustment required, in terms of a steady improvement in the structural primary balance, to be made between 2015 and 2020 (six years), to bring the general government debt-to-GDP ratio to 60% in 2030.

・S2 : The fiscal adjustment required, in terms of a steady improvement in the structural primary balance, to be made in 2015, to stabilize the general government debt-to-GDP ratio over an infinite horizon. (Note 2)With regard to S1, We calculate the fiscal adjustment required to bring the general government debt-to-GDP ratio to

100% in 2060. (Note 3) “Age-related expenditure” is expenditure whose levels per capita differ depending on cohort such as social security

expenditure of pensions, health care, long-term care, and unemployment benefits, and education expenditure. Projections are made reflecting demographic changes and spending per capita in each cohort based on the current policies.

(Note 4) Macroeconomic assumptions FY2013 to FY2023 : Cabinet Office (Jan. 2014), “Economic and Fiscal Projections for Medium to Long Term Analysis” (Economic Revival Case) FY2024 to FY2060 : Economic growth rate (2 cases): (i) real 1.0%・nominal 2.0%, (ii) real 2.0%・nominal 3.0% (based on the government’s Basic Policies for Economic and Fiscal Management and Reform) Nominal long-term interest rate: 3.7% (the assumption used in the 2009 examination of long-term pension financing by the Min. of Health, Labour, and Welfare) 5

＜Pop. aged 65 and over, Age-related expenditure＞ ＜ Components of age-related expenditure＞

Projection Results (1) “Age-related expenditure” --Impact of aging population

22.6%

29.6%

23.0%

39.9%

20%

25%

30%

35%

40%

2010 2020 2030 2040 2050 2060

Age-related expenditure

Pop. Aged 65 and over

10.3%

10.2%

6.5%

9.9%

1.5%

5.8%

4.4% 3.7%

0%

5%

10%

2010 2020 2030 2040 2050 2060

Public pensions

Health care

Education, Unemployment

benefits etc.

Long-term care

（% of GDP） （% of GDP）

（FY） （FY）

6

Long-term Projections on Japanese Public Finances (Fiscal System Council, April 28)

（Note）Solid lines in the above figures are numbers in the case of economic assumptions after FY2024 of 2.0% real economic growth rate, 3.0% nominal economic growth rate, and 3.7% nominal long-term interest rate.

Projection Results (2) “Required fiscal adjustment” （Case of 2.0% real economic growth and 3.0% nominal economic growth）

＜Debt Outstanding (General Government)＞

（FY） （FY） 7

＜Primary Balance (General Government)＞

＜一般政府の基礎的財政収支（対GDP比）（イメージ）＞

▲ 10%

▲ 5%

0%

5%

10%

2010 2020 2030 2040 2050 2060

Baseline①

Baseline②

PB after fiscal adjustment of S1 in Case①

PB after fiscal adjustment of S1 in Case②

8.20% 11.94%

Baseline①

Baseline②

Debt/GDP after fiscal adjustment of S1 in

Case① Debt/GDP after fiscal adjustment of S1 in

Case②

100%

200%

300%

400%

500%

600%

2010 2020 2030 2040 2050 2060

Fiscal System Council (May 30, 2014) points out “Achievement of a primary surplus in FY2020 is a starting point, not a final goal of fiscal consolidation” .

Long-term Projections on Japanese Public Finances (Fiscal System Council, April 28)

Fiscal Consolidation Targets

The Government aims to halve the primary deficit of the national and local governments to GDP ratio （-3.3％） by FY2015 from the ratio in FY2010 (-6.6％)

By FY2015

The Government aims to achieve a primary surplus By FY2020

The Government will seek to steadily reduce the public debt to GDP ratio

Thereafter

(“Medium-Term Fiscal Plan” (Approved by the Cabinet on August 8, 2013))

8