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Japan is aging and has the highest government debt-to-output ratio among advanced economies. In this article, we build a micro data-based, large-scale overlapping generations model for Japan in which individuals differ in age, gender, employment type, income, and asset holdings, and incorporate the Japanese pension rules. Using existing pension law, current fiscal policy, and medium variants of demographic projections, we produce future paths for government expenditures and tax revenues, with implications for government debt and the public pension fund. Additional pension reform, a higher consumption tax, and higher female labor force participation help achieve fiscal stability.

The demographics of ageing are not all doom and gloom. They also open up economic opportunities. In Japan, where retirees have high average wealth and life expectancy, there is an opportunity to develop new products targeted to the elderly and to expand 'silver' markets. A decline in the number of workers opens up working opportunities for those who might otherwise retreat from the labour force, such as women and elderly individuals, giving policymakers more incentive to invest in human capital and health so that people can work and live longer.

This paper develops a general equilibrium life-cycle model with endogenous labor supply in both intensive and extensive margins, consumption, saving, and benefit claiming to measure the long-run effects of a proposed Social Security reform. Agents in the model face medical expenditure, wage, health, and survival shocks. Raising the normal retirement age by two years increases labor supply by 2.8 percent and the capital stock by 12.6 percent, showing that both margins of adjustment are critical. General equilibrium effects are important to account for the effects of reform on savings, although the effects on labor supply are less important.

This paper analyzes the time trend of household consumption in Japan between 1981 and 2020, using microdata from the Family Income and Expenditure Survey (FIES). We examine how the trends in the levels, shares, and growth of consumption vary across categories of consumption, items, and age groups, and assess changes in consumption inequality over time. Our analysis shows that consumption inequality mildly increased, driven primarily by the trend of service consumption and a shift in the age distribution. Additionally, we estimate the life-cycle profiles of consumption and find that the age component of total consumption follows a standard hump-shaped pattern, but varies significantly across goods and service categories and item groups. Finally, using the estimated age profiles of different consumption items, we project how aggregate consumption and its composition may evolve as Japan’s population ages in the coming decades.

We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life-cycle structure of the model, whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system.

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump-sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare-improving for the current low-income households.

Drawing on the original survey of Japanese firms during the COVID-19 pandemic, we estimate the impact of the crisis on firms’ sales, employment and hours worked per employee and roles of work-from-home (WfH) arrangements in mitigating negative effects. We find that the lowered mobility, induced by the state of emergency declared by the government and fear of infection, significantly contracted firms’ activities. On average, a 10% reduction in mobility reduced sales by 2.8% and hours worked by 2.1%, but did not affect employment. This muted employment response is consistent with limited changes in aggregate employment at the extensive margin during COVID-19 in Japan. We find that the adoption of WfH before COVID-19 mitigated the negative impact by 55% in terms of sales and by 35% in terms of hours worked. Adapting to the pandemic by increasing the number of remote work employees also helped firms moderately mitigate the negative impact on sales and work hours and reduce the probability of filing for the short-time work subsidy.

Japan is faced with rapid demographic ageing and fiscal challenges. This paper simulates pension reform to reduce the replacement rate by 20% and raise the retirement age by 3 years gradually over a 30-year period. We consider three scenarios with different points in time to initiate reform in 2020, 2030 and 2040, respectively. A delay would suppress economic activities, lowering output by up to 4% and raising tax burden by more than 8% of total consumption. Delaying reform implies a transfer of costs of demographic ageing to the young and deteriorates the welfare of future generations by up to 3% in terms of consumption equivalence.