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The views expressed in this presentation are the views of the author and do not

necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI),
the Asian Development Bank (ADB), its Board of Directors, or the governments they
represent. ADBI does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.

Demographic Challenges to Japans


Fiscal Policy

November 2016
Policy Research Institute
Ministry of Finance, Japan

Outline

. Introduction

. Japans Fiscal Situation and Demographic Challenges 7


. Some Lessons from Japan

14

Introduction

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 Asian Countries

Comparison of European & the United States

(%)

(%)

40

Projected

Actual

40
Japan

Actual

Projected

Population (million) / component ratio

China

Japan27.5

35

India
Germany

30

30
Germany21.4

25

20

Indonesia
Japan
Korea

France
U.K.

Philippines

U.S.

Viet Nam

Thailand

20
15

France19.5
10

U.K.18.0
U.S.15.2

14
10

0
1950

1970

2000

2030

2050

2016
(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
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060
(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

Population Aging of Asian Countries


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)

(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.

Fiscal Situations in Asian Countries

Overall government debt positions of Asian countries appear strong.


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

120

100

80

China
India

60

Indonesia
South Korea
Phillipines

40

Thailand
United States

20

Note Data is combined with Historical Public Debt Database and World Economic Outlook Database
Sources IMF

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


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.
Government Debt (% of GDP, 1900-2015) in Japan, Europe and the U.S.
300

Japan

United States

United Kingdom

Germany

250

France

Japan

France
200

United Kingdom
150

United States
100

Germany
50

0
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

Note Data is combined with Historical Public Debt Database and World Economic Outlook Database
Sources IMF

Japans Fiscal Situation and


Demographic Challenges

Japans Fiscal Situation (1)


Japan continues to run budget deficits where expenditure exceeds tax revenue.
Trends in General Account Expenditures and Tax Revenues
(trillion yen)

Global Financial Crisis

Collapse of
Bubble Economy

120

101.0

100.7

100.2

100
89.0

80

75.1
70.5
65.969.3

60
46.9
43.4

29.1
24.5

21.9

20.9

13.8

5.3
3.2
2.1

15.7

7.2
3.7
3.5

61.5
57.7
60.1
54.9
53.0
53.6
51.5
50.8
47.2 50.6
46.8

78.8
75.9

26.9

29.0 30.5

23.7

32.4

54.1

51.9

Total Expenditures

52.1

49.4

51.0

50.7
47.2

47.9

37.5

Construction Bond Issues

34.0

33.0

13.5 14.2 12.9 14.0 13.5 12.8


12.3 11.3
10.7
9.4
9.6
7.1 7.0 7.0 7.0 6.8 6.4 6.3
6.2
5.0 6.3
6.9
7.2 5.9 7.0 6.7 6.4 6.0 5.0
4.5 4.3 6.3
2.5

19.9

17.0

6.7

27.5
6.4

18.5

25.4

6.6

6.3

6.7

6.2

6.4

6.3

6.7

1.0

0.2

9.5

16.4
9.2

0.8

24.3
16.9

21.9 20.9

28.7 26.8
25.8

23.5

8.4

54.0
47.0
40.9

11.4

7.0

56.4

57.6

38.5 36.4
6.6

6.5

34.4
6.1

6.0
36.9

10.7 9.9
16.2 12.3

7.6

7.0

13.2
9.5

47.5

43.9
42.8
41.5

33.2

7.8

16.2

7.2

15.0

38.7

8.7

9.1

52.0

42.3 42.8

31.3
9.1

11.1

51.0
44.3

35.0 35.3 35.5

13.2

Special Deficit-Financing Bond Issues

49.1

49.1
43.8 45.6
43.3

30.0

18.4

84.7

81.8

Tax 53.9
revenues

54.4

17.3

85.581.4

82.4

41.9
34.9

84.9

78.5

70.5

59.8

95.3

89.3 84.8
83.7

38.2

38.8
34.1

40

20

73.6

96.7

98.8

97.1
84.4

99.7

26.2

34.7 34.4 36.0 33.8


31.9 29.9
28.4

21.1 19.3

8.5

2.0

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

(FY)

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


Sources Ministry of Finance

Japans Fiscal Situation (2)


The ratios of Social Security and National Debt Service in General Account Expenditures
have been growing.
Breakdown of Trends in General Account Expenditures from 1960 to 2015
(%) 100

80
51.2

43.2

36.6

29.7

25.3

20.7

6.2
10

13.3

16.1

60

Public Works

15.9
23.0

17.6
40

17.4

20

17.7

Local Allocation Tax Grants, etc.


24.3
National Debt Service

16.0
21.6

18.8

20.7
32.7

3.5

1.5
11.1

14.1

1960

1970

Social Security

24
12.7

others

18.8

16.6

19.7

1980

1990

2000

0
2015

(FY)

(Sources) Ministry of Finance

Japans Fiscal Situation (3)


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

(%) 100%
100

90%
90
80%
80

34.5

19.2

19.8

21.2

25.7

29.7

6
5

70%
70
60%
60

(% of GDP)

14.1

26.6

35.6

37.8

30.8

29.6

50%
50
7.5

40%
40
30%
30
20%
20

51.4

8.8

7.6

2
44.7

43.7

34.7

34.7

36.4

2000

2010

2015

10%
10
0%
0

Welfare and Employment


National Pension
Long-term care insurance
Health insurance premium
Socialsecurity-related
security-related
Social
expenditures to GDP ratio
expenditure
to GDP ratio
(Right axis)

0
1972

1980

1990

FY

1972

1980

Total social
security-related
expenditure ()

1.6 trillion

8.2 trillion

Social securityrelated
expenditure to
GDP ratio (%)

1.7

3.3

1990

2000

2010

(FY)

2015

11.6 trillion 16.8 trillion 27.2 trillion 31.5 trillion


2.6

3.3

5.7

6.2

(Note) The data of social security- related expenditures are from each years 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

Demographic change in Japan (1)


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

Populationten thousand

14,000

Actual National Census etc.

Projected (2012)
12,806
11,662

12,000

3,685

10,000

8,674

Aged 65 and over

8,000
6,773
3,464

Aged 15-64

6,000

4,000

Total fertility rate

Proportion of
population
aged 65 and
over
39.9%

Proportion
of workingage
population
50.9%

4,418

Total
fertility rate
1.35

2,000

Aged 14 and under

1.39
(2010)

1,204
791

0
1950

1960

1970

1980

1990

2000

2010

2020

2030

2040

2050

(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,
Japans Demographic Composition in the Future (estimation as of January 2012), Ministry of Health, Labor and Welfare Vital Statistics

2060

11

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.
1945
After the WW
Men

28 years

1973
The first year of high-level
social welfare

Women

Men

42 years

Women

30 years

2015
Last year
Men

Women
100

age

65

80

80

70

70

60

60

50
40

50

90

80

80

70

70
60
The second
baby boomers
Age:71~74

50

50

40

30

30

30

20

20

20

20

10

10

10

10

0
100

100

40

30

20

Women

60

The second baby


boomers
Age:41~44

50
The first baby
boomers
Age:24~26

Men
The first baby
boomers
Age:96~98

90

The first baby


boomers
Age:66~68

2045
Near future

50

100

100

50

0
0

40

50

100

100

50

50

100 100

50

50

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

100

(ten thousand )

(Note) 1945s 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,
Japans Demographic Composition in the Future (estimation as of January 2014), UN World Population Prospects 2015 revision

12

Projection of Age-Related Spending in Japan


Age-related spending is expected to rise further.
Change in aging rate and age-related spending
( % of GDP)

(% of GDP)

Change in each break down items

39.90%

40%
40

10.31%11.00%
Public pension

10
10%

9.93%

Aging rate
35
35%

9.73%9.91%
Health care

7.30%
6.01%6.11%

Age-related spending

30%
30

29.1%

29.75%30.78%

5
5%

25
25%

Long-term care

2.45%
23.65%

20
20%
2020

2030

2040

2050

2060

0
0%

2020
2030
2040
2050
2060
(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 Japans 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.
(Sources) Ministry of Finance

13

. Some Lessons from Japan

Increase in Social Security Benefits and


the demographic transition in Japan
With the rapid progress of aging population, social security benefits have been
increased.
(% of GDP)
Social Security Benefits to GDP Ratio
Establish of
universal health
insurance and
universal pension
coverage (1961)

First year of
high-level
social welfare
(1973)

Establish of public longterm care insurance


system (2000

Establish of health
services scheme for
the aged (1983)

Establish of latterstage elderly


healthcare system
2008

(FY)

1950
Year
Topics, etc.
Life expectancy
(Men)
Life expectancy
(Women)

55

60

65

70

75

80

1970
1980
1960
Establish of
Establish of
universal health First year of highhealth services
insurance and
level social
scheme for the
universal pension
welfare
aged
coverage

85

90

95

2000

05

10

15

1990

2000

2010

2015

The bubble
economy period

Establish of public
long-term care
insurance system

Establish of latterstage elderly


healthcare
system

Last year

65.3

69.3

73.4

75.9

77.7

79.6

80.8

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

(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

15

Socio-Economic Projections and Actual Results in Japan


A social security system should be designed based on the long-term projections.
Fiscal System CouncilNov. 28, 1968
However , there were great differences between actual results and projections.
(%) 2.4

2.2

Transition of the total fertility rate


Projections(as of 1969)

Projections(as of 1986)

2
1.8
1.6
1.4

Actual value

1.2
1

69
74
79
84
89
94
99
4
9
(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

Projections(as of 2012)

40
30

10

Projections (as of 1969)


Since 1973

6.2

Actual value

20

Projections(as of 1975)

(FY)

Investment yield of public pension

Transition of the aging rate

(%) 50

14

Projections (as of 1990)


Since 1990

0
1970 80
90 2000 10
20
30
40
50
(FY)
(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, 19702050-
Ministry of Internal Affairs and Communications Population Projection

5.5

Actual value
19731988

6.9 (average)

19902014

3.7 (average)

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

16

Hypothetical Projection Error of Health-Care


Expenditures in Japan
The long-term projection of health-care expenditure could have been underestimated
considerably.
PRIs 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.
(% to GDP)

Health-Care Expenditure

The aged people: 70+

Per-capita health care expenditure

(10 thousands yen)

70+ to 75+

The aged people:


75+

(FY)

(FY)

(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.

17

Thank you very much!

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