aging population and fiscal stability condition …...aging population and fiscal stability...
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Aging Population and Fiscal Stability condition faced with population Aging
Naoyuki Yoshino, Ph.D. Dean, ADB Institute, [email protected]
Tetsuro Mizoguchi, Ph.D. Reitaku University, [email protected]
Farhad Taghizadeh-Hesary, Ph.D. Keio University, [email protected]
Tokyo Fiscal Forum IMF-ADBI-PRI June 11, 2015
Background (Background) • Japan entered into the aged-society Japan faces the huge increases of social security. • Japan accumulate the huge budget deficits → Managing the demand for government bonds are very important. (Main Purpose) We propose the fiscal policy rules that attain both the fiscal sustainability and the economic recovery facing with aging-society.
Objectives & Main Results 1. Domar rule(interest rate < economic growth) Bohn’s condition 𝑷𝑷𝒕 = 𝑷𝑷𝟏 + 𝝁 𝒃𝒕−𝟏 − 𝒃𝟎 Obtained from Government Budget Constraint 2. Supply of Government bond Demand for Government bond is neglected Bohn’s condition does not satisfy economic recovery Objective loss function focuses only on the stability of the budget and not on economic growth. 3. New Fiscal Policy Rules need to be estabilished.
General Questions Japan’s gross Debt/GDP ratio is around 230% Greece gross Debt/GDP ratio is 188%. Why did Greece go into trouble ? Why does JGB interest rate be lowerest? ⇒Three reasons: the demand structure for government bonds; Low Sale Tax Rate(large fiscal space); Independent Monetary Policy
1995 2014
95.1% 229.6%
Japan’s Debt /GDP Ratio
5
1995 2014 101.2% 188.7%
Greece Debt / GDP Ratio
Source: OECD Economic Outlook
Gross Debt/GDP ratio, 2014 Selected OECD Countries
6
Source: OECD Economic Outlook
229.6
188.7
147.2
111.1
35.2 31.6
13.0
0.0
50.0
100.0
150.0
200.0
250.0Ja
pan
Gree
ceIta
lyPo
rtug
alIre
land
Fran
ceO
ECD-
Tota
lSp
ain
Belg
ium
Uni
ted
Stat
esU
nite
d Ki
ngdo
mIc
elan
dCa
nada
Hung
ary
Aust
riaN
ethe
rland
sSl
oven
iaGe
rman
yFi
nlan
dSl
ovak
Rep
ublic
Czec
h Re
publ
icPo
land
Denm
ark
Swed
enSw
itzer
land
New
Zea
land
Kore
aN
orw
ayAu
stra
liaLu
xem
bour
gEs
toni
a
perc
ent
7
0
50
100
150
200
250
Japan Canada Italy U.S.A Greece
Gross Debt/GDP ratio (2013) (Selected Countries)
Data Source:OECD Outlook
General Government Net Debt (International Comparison)
0
20
40
60
80
100
120
140
160
1999200020012002200320042005200620072008200920102011201220132014
Japan U.K. Germany France Italy Canada
Source: MOF
Japan 148.7
Japan
• First we would like to show the Flow of Fund in Japan.
• Who held JGB? How much? How about Greece?
• The demand for government bond and holders create different consequences.
9
Recent Money Flow of Japan
10
Source: BOJ Flow of Funds
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
Jul-9
1Ju
n-92
May
-93
Apr-
94M
ar-9
5Fe
b-96
Jan-
97De
c-97
Nov
-98
Oct
-99
Sep-
00Au
g-01
Jul-0
2Ju
n-03
May
-04
Apr-
05M
ar-0
6Fe
b-07
Jan-
08De
c-08
Nov
-09
Oct
-10
Sep-
11Au
g-12
Jul-1
3Ju
n-14
Bank Loan (City Banks)
Bank Loans (RegionalBanks I & II)
Bank Loans of Japan
11
Source: BOJ billion Large Banks : 202 trillion yen Regional banks: 216 trillion yen (2014, Nov)
Declining Bank Loans in Japan
1. Stricter Basel Capital Requirement (Basel III) 2. Government Bonds = Zero Risk 3. Declining Domestic Demands for Bank Loans Shift production from Japan to other Asia Low expected rate of return 4. Corporations’ Surplus Profits from Overseas’ production Cash rich companies
12
Changes in Japan’s Money Flow High Growth Period Households Savings Corporate Capital Investment Stock S I K Recent Period Corporate Savings Government Elderly people S G(B) Abolish Retirement Age Increase working population Pension payment will start 65 or later Wage rate be based on marginal productivity
13
FY 2012 General Account Initial Budget (Japan)
Source: MOF
Local Allocation Tax Grants, etc.
161,424 16.8%
Public Works 5,968.5
6.2% Education & Science 5,442.1
5.7%
National Defense 4,884.8
5.1%
Others 9,656.8 10.1%
(Note1)Figures may not add up to the totals due to rounding.
(Note2)The ratio of Social Security expenses to General Expenditures*:54.0% *General Expenditures equals to the Primary Expenditure minus Local Allocation Tax Grants, etc.
Social Security 30,517.5
31.8% General Account
Total Expenditures 95,882.3 (100.0%)
Redemption of the National Debt
13,138.3 13.7%
Interest Payments 10,131.9
10.6%
Primary Expenses 72,612.1
75.7%
National Debt Service
23,270.2 24.3%
General Account Budget for FY2014 -Breakdown of Expenditure-
Food Supply 1,050.7 (1.1)
Promotion of SMEs 185.3 (0.2)
Energy 964.2 (1.0)
Former Military Personal Pensions
444.3 (0.5)
Economic Assistance 509.8 (0.5)
Miscellaneous 6,152.6 (6.4)
Contingency Reserves 350.0 (0.4)
Total Account (Initial General and Special Account, 2014)
[分類名] 91.4
[パーセンテージ]
[分類名] [値]
[パーセンテージ]
[分類名], [値]
[パーセンテージ]
[分類名] [値] [パーセンテージ]
[分類名] [値]
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Total 234.7
Unit: trillion Yen
Budget Allocation of Central Government (Japan, 1985-2011)
17
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Bond Expenditure
Education
Social Securities
Defense
Exp of Local Government
National land conservationand development
Source: MOF Billion yen
Trends in Interest Payments and Interest Rate
18
Source: MOF
0
100
200
300
400
500
600
700
800
900
0
2
4
6
8
10
12
14
16
18
20
1975 1980 1985 1990 1995 2000 2005 2010
Government Bond Outstanding
Interest Rate
Interest Payment
(trillion Yen) (%)
Trends in General Account Tax Revenues, Total Expenditures and Government Bond Issues
0
20
40
60
80
100
120
Special Deficit-Finanicing BondIssues
Construction Bond Issues
Tax Revenue
Total Expenditure
Source: MOF
Crocodile’s Mouth
Population Aging of Japan
20
Source:Ministry of Internal Affairs and Communication
Forecast (2012) 10 of Thousands
Current Figures
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000Age 65 andover
Age 15~64
Age 14 andless
AgedPopulationRatioWorkingPopulationRatio (15-64)Total FertalityRate (TFR)
FY
Peak of the Population 2004, 127.8 million
Total Fertility Rate (TFP) of Major Countries (1980-2015)
21
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
1980-1985 1985-1990 1990-1995 1995-2000 2000-2005 2005-2010 2010-2015Korea U.S.A France United KingdomGermany Japan India Brazil
Source: UN
Aged Dependency Ratio of Major Countries (1980-2040)
22
0
10
20
30
40
50
60
70
1980 1987 1994 2001 2008 2015 2022 2029 2036
Korea U.S.A France United Kingdom Germany
Japan India Brazil China Russia
Source: UN
Aged Population of Major Countries (1980-2040)
23
0
50
100
150
200
250
300
350
400
1980 1990 2000 2010 2020 2030 2040
Korea U.S.A France United Kingdom Germany
Japan India Brazil China Russia
(2010=100)
Source: UN
Households’ Savings Ratio
24
0
2
4
6
8
10
12
14
16
18
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014Canada Japan United States Euro area (15 countries)
Source: OECD
Effects on Population Aging and Declining Birthrate
(1) GDP Growth Rate↓(Working Population Declining) → Debt/GDP Ratio↑
(2) Life Cycle Saving Households’ Saving Rate↓ → Demand of Government Bond ↓ (3) Pay-as-you-go System (Pension)→Broadening the generation disparity→It will be burdened
25
Generational Inequality Aged People have strong VOICE→Voting Right Young generation do not have any Voting Right. Young people do not go for Voting. Aged People wants to receive benefits. Japanese Pension Scheme -- Pay as you go system In 1950s, Retirement Age 55, Life expectancy 59 In 2010, Retirement Age 60,65, Life expectancy 88 We proposed to start pension payments from 60->65->70 by allowing old people to work Japanese Survey shows many people want to work
26
MOF’s JGB management policy
(1) Dialogue between MOF and market participants (esp, Institutional investors) (2) Diversification the JGB holders and it’s variety (3) Improvement of Liquidity in JGB (4) Sophistication of Debt Management
27
Issues of Various Government Bond
Short term 1 to 5 years (Banks, Postal Saving) 10 years (Trust Banks, Insurance) Inflation indexed bond 15 year (floating bond) 20 year (Insurance, Pension Funds, Kampo) 30 year (Insurance, Pension funds) 40 year (Pension fund, Insurance)
28
Market Issuance Plan by JGB Types
29
Unit:trillion Yen Source: MOF Source: MOF
Japanese Debt (2012) HOLDERS %
Banks and Postal Savings 45% Life and Non-life Insurances 20% Public Pension funds 10% Private Pension Funds 4% Central Bank of Japan 8% Overseas’ Investors 8% Households 5% Others 3%
30 Source: BOJ
Japanese Debt, 92% are held by Domestic Investors (2014)
HOLDERS %
Banks and Postal Savings 27.8% Central Bank of Japan 21.2% Life and Non-life Insurances 19.3% Overseas’ Investors 8.5% Public Pension funds 6.4% Private Pension Funds 3.4% General Government 2.6% Households 2% Others 1.5% 31
Source: BOJ Flow of Funds
Abenomics
BS of BOJ
Long term JGB
89
Others
Banknotes 87
Current deposit 47
ETF etc. 6.6
Long term JGB
142
Others
Banknotes 90
Current deposit
107
Long term JGB
200
Others
Banknotes 87
Current deposit
177 ETF etc. 8
ETF etc 9.3
Total Asset: 158
Total Asset: 224
Total Asset: 297
FY2012 FY2013 FY2014
Data Source:BOJ
Unit: Trillion Yen
Monetary Base (Seasonally Adjusted / Average amounts outstanding)
34
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
Source: BOJ
Unit: 100 million yen
Greece, 72% of their debts are held by overseas’ Investors (2011)
HOLDERS % Eurozone 15% ECB 15% IMF 6% Greek banks & non-banks 23% Other European Banks 10% Non European Banks 8% Non-Greek non-Banks 23%
Source:Financial Times 35
where
𝒓𝒕=Interest Rate 𝜼𝒕=Growth rate
36
𝒃𝒕 − 𝒃𝒕−𝟏 = 𝒓𝒕 − 𝜼𝒕 𝒃𝒕−𝟏 + 𝒈𝒕 − 𝒕𝒕
𝒃𝒕 =𝑷𝒕𝒀𝒕
,𝒃𝒕−𝟏 =𝑷𝒕−𝟏𝒀𝒕−𝟏
,𝒈𝒕 =𝑮𝒕𝒀𝒕
, 𝒕𝒕 =𝑻𝒕𝒀𝒕
Domar Condition
Interest rate and Economic growth rate (1995-2013)
Source: MOF and Ministry Cabinet 37
Domar Condition does not hold in Japan 19
95Q
119
95Q
319
96Q
119
96Q
319
97Q
119
97Q
319
98Q
119
98Q
319
99Q
119
99Q
320
00Q
120
00Q
320
01Q
120
01Q
320
02Q
120
02Q
320
03Q
120
03Q
320
04Q
120
04Q
320
05Q
120
05Q
320
06Q
120
06Q
320
07Q
120
07Q
320
08Q
120
08Q
320
09Q
120
09Q
320
10Q
120
10Q
320
11Q
120
11Q
320
12Q
120
12Q
320
13Q
120
13Q
3
-10
-8
-6
-4
-2
0
2
4
6
Interest Rate
GDP Growth Rate
Bohn’s Condition
38
• 𝑃𝑃𝑡 = 𝑔𝑡 −𝑡𝑡 Primary Balance(PB) • 𝑷𝑷𝒕 = 𝑷𝑷𝟏 + 𝝁 𝒃𝒕−𝟏 − 𝒃𝟎 Bohn’s Rule: Primary
Balance improvement Rule at t
∑ 𝑃𝑃𝑡𝜆 𝑡
∞𝑡=1 = 𝑏0
• Bohn’s Rule satisfied with “transvesarity condition”.
Implication of Bohn’s condition • Bohn’s condition only gives that the budget
balance is retained in the long run.
→ Bohn’s condition attains the fiscal sustainability. However, it cannot exclude the economic contraction equilibrium where people’s income will decrease and government expenditure will be cut. → That is the reason why we propose the fiscal policy rule with both economic recovery and fiscal sustainability.
39
Japanese Government Bond Yields
0
0.5
1
1.5
2
2.5
5 year
10 year
Source: MOF
Interest rate in selected OECD countries
41
0
5
10
15
20
25
30
35
Jan-
2000
May
-200
0Se
p-20
00Ja
n-20
01M
ay-2
001
Sep-
2001
Jan-
2002
May
-200
2Se
p-20
02Ja
n-20
03M
ay-2
003
Sep-
2003
Jan-
2004
May
-200
4Se
p-20
04Ja
n-20
05M
ay-2
005
Sep-
2005
Jan-
2006
May
-200
6Se
p-20
06Ja
n-20
07M
ay-2
007
Sep-
2007
Jan-
2008
May
-200
8Se
p-20
08Ja
n-20
09M
ay-2
009
Sep-
2009
Jan-
2010
May
-201
0Se
p-20
10Ja
n-20
11M
ay-2
011
Sep-
2011
Jan
-201
2 M
ay-2
012
Sep
-201
2 J
an-2
013
May
-201
3 S
ep-2
013
Jan
-201
4 M
ay-2
014
Sep
-201
4
Perc
ent p
er a
nnum
France
Germany
Greece
Italy
Japan
Portugal
Spain
UnitedKingdom
United States
Source: Monthly Monetary and Financial Statistics (MEI), OECD statistics
Japan’s Supply and Demand for Bonds
tr StB∆
DtB∆
tB∆
4321 EEEE →→→
1E2E
3E4E
42
Greece Supply and Demand for Government bonds
43
tB∆
tr StB∆
DtB∆
Greece
1E
2E3E
4E
4321 EEEE →→→
Greek Case and Japanese Case • Greek Case Foreign fund → large Domestic Deposits →Small →In GGB market, Foreign funds flow out →Interest Rate goes up • Japanese Case Foreign fund → Small Domestic Deposits →Large →In JGB market, Domestic deposits flow into the JGB market →interest rate deflates, whereas the supply of JGB is sufficiently large.
Macroeconomic Model (Supply and Demand for Gov. Bonds)
𝑮𝒕 + 𝒓𝒕𝑷𝒕−𝟏 = 𝚫𝑷𝒕 + 𝑻𝒕 Government Budget Constraint 𝒀𝒕 − 𝑻𝒕 + 𝒓𝒕𝑷𝒕−𝟏 + 𝜽𝑮𝒕 = 𝑪𝒕 + 𝑺𝒕 where 𝑺𝒕 = 𝚫𝑷𝒕 + 𝚫𝑾𝒕
𝑫 − ∆𝑾𝒕𝑭 and 𝜽𝑮𝒕: Public
Investment for elder people 𝒀𝑫𝒕 = 𝒀𝒕 + 𝜽𝑮𝒕 + 𝒓𝒕𝑷𝒕−𝟏 − 𝑻𝒕 = 𝑪𝒕 + 𝑺𝒕 Disposable Income 𝑪𝒕 = 𝒄𝟎 + 𝒄𝟏𝒀𝑫𝒕 Consumption Equation 𝑾𝒕 = 𝒅𝟎 + 𝒅𝟏𝒀𝑫𝒕 + 𝒅𝟐𝒓𝒕 Deposit Equation
45
The long-run interest rate and the long run equilibrium level of debt
𝑷𝒕 = 𝒅𝟐 𝑮�−𝑻�
𝟏−𝒄𝟏−𝒅𝟏 𝒀𝒕𝒇− 𝟏−𝜽 𝑮� +𝑾𝑫+𝑾𝑭− 𝒄𝟎+𝒅𝟎
𝒓𝒕�
=𝒄𝟎 + 𝒅𝟎 + 𝟏 − 𝜽 𝟏 − 𝒄𝟏 − 𝒅𝟏 𝑮� − 𝟏 − 𝒄𝟏 − 𝒅𝟏 𝒀𝒕
𝒇 −𝑾𝑫 −𝑾𝑭
𝒅𝟐
Objective Loss Function of the Government
Minimize the following loss function: 𝐿 𝑃𝑡,𝑌𝑡,𝐺𝑡,𝑇𝑡,∆𝑃𝑡
=12𝑤1 𝑃𝑡 − 𝑃𝑡∗ 2 +
12𝑤2 𝑌𝑡 − 𝑌𝑡
𝑓 2
+12𝑤3 𝐺𝑡 − 𝐺𝑡−1 2 +
12𝑤4 𝑇𝑡 − 𝑇𝑡−1 2
+12𝑤5 ∆𝑃𝑡 − ∆𝑃𝑡∗ 2
𝑤𝑖 (𝑖 = 1,⋯ , 5) are the policy weights where government can set up.
47
Objective Loss Function of the Government
(i) Sustainable Debt /GDP ratio (ii) Stable Economic Growth (iii)Smooth Government Spending (iv)Smooth Tax Revenue (v) Smooth change of flow of bonds
48
Fiscal Policy Rule to stabilize Government Budget Deficits
Our Proposed Government Spending Rule is 𝐺𝑡 − 𝐺𝑡−1
= 𝛼1 𝑃𝑡 − 𝑃𝑡∗ + 𝛼2 ∆𝑃𝑡 − ∆𝑃𝑡∗ + 𝛼3 𝑌𝑡 − 𝑌𝑡𝑓
where𝛼1 = 𝑤1𝑤3
𝑑2− 1−𝜃 1−𝑐1−𝑑1 𝑃𝑡−1𝑑2− 𝑐1+𝑑1 𝑃𝑡−1
,𝛼2 =𝑤5𝑤3
𝑑2− 1−𝜃 1−𝑐1−𝑑1 𝑃𝑡−1𝑑2− 𝑐1+𝑑1 𝑃𝑡−1
,𝛼3 = −𝑤2𝑤3𝜃
49
Optimal Taxation Rule
Our Proposed Government taxation Rule is 𝑇𝑡 − 𝑇𝑡−1 = 𝛽1 𝑃𝑡 − 𝑃𝑡∗ + 𝛽2 ∆𝑃𝑡 − ∆𝑃𝑡∗ +
𝛽3 𝑌𝑡 − 𝑌𝑡𝑓
where𝛽1 = 𝑤1𝑤4
𝑑2𝑑2− 𝑐1+𝑑1 𝑃𝑡−1
,𝛽2 = 𝑤5𝑤4
𝑑2𝑑2− 𝑐1+𝑑1 𝑃𝑡−1
,𝛽3 = 𝑤2𝑤4
50
Fiscal Policy Rule to stabilize Government Budget Deficits
(i) Current Debt – Desired Debt (ii) GDP-gap (iii) Smooth change of government spending (iv) Smooth change of taxation (v) Affordability of Financial Wealth which can be allocated to hold Government Bonds →𝑷𝒕∗
51
Augmented Bohn’s Rule • From our proposed Government spending rule and
taxation rule, we have the following augmented Bohn’s Rule:
𝑷𝑷𝒕 − 𝑷𝑷𝒕−𝟏= 𝜶𝟏 − 𝜷𝟏 𝑷𝒕 − 𝑷𝒕∗+ 𝜶𝟐 − 𝜷𝟐 ∆𝑷𝒕 − ∆𝑷𝒕∗
+ 𝜶𝟑 − 𝜷𝟑 𝒀𝒕 − 𝒀𝒕𝒇
• This is the version of considering both Economic recovery and fiscal sustainability.
52
Policy Implications from the rule
• Bohn’s condition does not satisfy economic recovery. It only gives a condition that the budget balance is retained.
• The fiscal policy rule has to watch how the government debt diverges from the desired level and the GDP gap.
53
Empirical Survey
( ) )(13364558444390 tt rB +=∆
[ ])(212585153)( tt rI ∆−=∆
)(53.09445 tt YDC +=
)(675616)(22.0-10828237)( ttD
t rYDW −+=∆
Demand of government Bond
Investment function,
Consumption Equation
Deposit Equation
55
Theoretical equilibrium GDP and the actual real GDP of Japan (2003Q4 – 2013Q4)
60
70
80
90
100
110
120
130
Y_r Y*
Noted: Y* (constant line) is the obtained income in the short-run equilibrium. Y_r (dashed line) is the real income seasonally adjusted.
56
Theoretical equilibrium interest rate and the actual interest rate on bond (2003Q4 – 2013Q4)
0.00%0.20%0.40%0.60%0.80%1.00%1.20%1.40%1.60%1.80%2.00%
r* r
Noted: r* (constant line) is the obtained interest rate in the short-run equilibrium. r (dashed line) is the long-run JGB interest rate.
57
Government Expenditures and Tax
80
85
90
95
100
105
110
115
1994
Q1
1994
Q3
1995
Q1
1995
Q3
1996
Q1
1996
Q3
1997
Q1
1997
Q3
1998
Q1
1998
Q3
1999
Q1
1999
Q3
2000
Q1
2000
Q3
2001
Q1
2001
Q3
2002
Q1
2002
Q3
2003
Q1
2003
Q3
2004
Q1
2004
Q3
2005
Q1
2005
Q3
2006
Q1
2006
Q3
2007
Q1
2007
Q3
2008
Q1
2008
Q3
2009
Q1
2009
Q3
2010
Q1
2010
Q3
2011
Q1
2011
Q3
2012
Q1
2012
Q3
2013
Q1
2013
Q3
2014
Q1
TAX Gov. Expenditures
Conclusion 1.We must consider the fiscal policy rules that attain both fiscal sustainability and economic recovery facing with aging & declining birthrate society. 2.From flow of funds, we observed that the private sector’s money flow finances the government debt. However these private sector’s money flow should go not to the government debt finance but to the private economic activity in order to attain the economic growth for fiscal sustainability.
58
Conclusion 3. Because Japan will enter the aged-society, we should postpone the retirement age in order to increase the working-age section and reduce the top portion. And to base wage rates on productivity rather than seniority, as is traditionally the case in most Japanese firms. 4. Using the hometown investment trust fund (Yoshino 2013). The goal of the fund is to connect investors with their hometowns. Since the bank lending still be low, the hometown investment trust fund will be another way to finance SMEs which are needed the funding.
59
References • Bohn, H. (1998) “The Behavior of US Public Debt and Deficits”, Quarterly Journal of Economics, Vol.113, No.3,
pp. 949-963. • Bohn, H. (2005) “The Sustainability of Fiscal Policy in the United States,” CESifo WP No. 1446. • Domar, E. D. (1944) “The Burden of the Debt and the National Income”, American Economic Review, Vol.34,
No.4, pp.798-827. • McNelis, P and N, Yoshino (2012) “Macroeconomic Volatility under High Accumulation of Government Debt:
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Thank you very much for your attention.
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