40th Medium-Term Forecast:
2013-2025

April 2014
The 40th Medium-Term Economic Forecast (2013FY—2025FY)

Scenario for Achieving Both Economic Growth and Fiscal Consolidation— Verifying Japan’s Economic Fundamentals
JCER Medium-Term Economic Forecast Team

<Summary>
The Japan Center for Economic Research released its 40th Medium-Term Economic
Forecast for 2013FY through 2025FY. The Japanese economy currently faces concern that not
only the population but also capital stock is declining and aging. In this economic situation,
fiscal consolidation has become a burning issue. Although a decision to raise the consumption
tax rate from this April has been made, and a second increase in 2015 is also on the horizon,
further consumption tax hikes are unavoidable in view of projections of population decline
and population aging. This medium-term economic forecast verifies Japan’s economic
fundamentals, assuming consumption tax is increased further to achieve fiscal consolidation.

Fiscalconsolidation

The consumption tax rate needs to be raised in annual increments of
1% from FY2017 (reaching 19% in 2025).

 If the consumption tax rate is increased in annual increments of 1% from FY2017, economic
growth of around 0.9% will be achieved from FY2013 to FY2025, and it will be possible toturn the central and local governments’ primary balance positive in FY2025. On the other
hand, under a consumption tax rate not exceeding 10%, economic growth of around 1.1%
would be achieved from FY2013 to FY2025, but the primary balance would remain in
negative territory, showing a deficit of around 3% of nominal GDP, and the sovereign default
risk would rise.

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40th Medium-Term Forecast:
2013-2025

Inflation
Rate

Although inflation rate will be positive, it will fail on the 2% pricestability target: Fundamentals of the demand side will be weak.

 Further consumption tax hikes will add to the household burden, and the decline in thehousehold savings rate is expected to steepen. Consequently, it will be difficult for
consumption to grow.
 Because consumption will be restrained, upward pressure on prices will remain weak, making
it difficult for the Bank of Japan to achieve its 2% price stability target, even with the
projected consumption tax hikes. It is not easy to achieve the Bank of Japan’s price stability
target.
 The national savings rate, which was in a downward trend, will stabilize due to the reductionin the fiscal deficit. The increase in national savings makes it possible to sustain the correctionof the strong yen and low real interest rates brought about by Abenomics for
medium-to-long-term and it will support growth in exports and investment.

Current
Account

Current account will not turn steadily negative in 2010s, conditionedon the further tax hike: The tax hike will push up the national savings.

 The recent fall of the current account surplus is largely due to the increase of imports to fill
the last-minute demand before the consumption tax hike.
 In the main scenario, where the consumption tax rate is raised to 19%, fiscal consolidation
will support the national savings, and as a result, current account deficit is put off for the time
being. In the scenario where the consumption tax rate stays 10%, the current account will turndeficit in late 2010s.
 Due to the shift of production site to overseas and a hollowing-out of the consumer
electronics equipment production, structural changes may be occuring that curb exports andincrease imports. If the current account turns negative, the ratio of government securities
holding by foreign investors increases and it may destabilize the market.

2

40th Medium-Term Forecast:
2013-2025

SupplyCapacity

Supply capacity supported by world’s highest skilled adults: But there
is still much room for improvement.

 Private capital stock, which forms the foundation for production capacity, will be maintained
at a level commensurate with the size of the economy because private investment will grow.
 Although demand for replacement investment will increase significantly in the future, public
capital stock will generally remain at a stable level compared with the size of the economy
until FY2025, provided the level of government fixed capital formation recorded in FY2010
is maintained. However, there will be regional differences, necessitating selection of the
public capital to be maintained.
 The Survey of Adult Skills of the Organization for Economic Co-operation and Development(OECD) published in October 2013 showed that Japan boasts the highest quality adults
among the participating countries. On the other hand, considering there is no difference
between men and women in adult skills, opportunities for women in Japanese society are
limited, and the high level of adult skills is not being translated into economic outcome. Thereremains much room for improvement.
 Conclusion of the Trans-Pacific Partnership (TPP) will not only improve the export
environment, it will also encourage investment in Japan. Corporate tax cuts are also needed tobring about expansion of investment in Japan and the introduction of more superior
technologies.

Tokyo
Olympics

Production inducement effect will be 3.9 trillion yen.

 While Japan’s hosting of the Tokyo Olympics and Paralympics is also expected to bringeconomic benefits, due to the large overlap with the existing social infrastructure development
plans of the Tokyo Metropolitan Government, production inducement effect, including theyears running up to the games and beyond, will be around 3.9 trillion yen, which is limited
given that Japan’s annual gross domestic product (GDP) is around 500 trillion yen. Benefits
such as the promotion of sport and the improvement in people’s mental and physical health,social connections and international friendship achieved through sport will not necessarily bereflected directly in GDP, but it is hoped that, in the long-term, the games will have the effectof raising levels of welfare and also productivity.

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40th Medium-Term Forecast:
2013-2025

Global Economy& Energy

Global growth will be 3%.

 Largely due to the shale revolution, the energy price outlook is slightly more soothing. Further
power savings will be made, and this forecast expects that, in 2030, power consumption willbe 20% lower than the 2010 level.
 The Chinese economy will end the phase of high-growth led by the investment, and just as
Japan 40 years ago and South Korea 20 years ago, its pace of growth is expected to slow in
the future and will probably be around 3% from 2020 onwards.
 Global growth will be around 3% over the period of the forecast, about the same with the
2000s. Global growth weighted by the shares of Japan’s export destinations will be 4% in theearly 2010s, 3.7% in the late 2010s, and 3.1% in the early 2020s, maintaining a high level ofgrowth due to the comparatively high growth of Asian markets and other main export
destinations.
 Due to factors such as improvement in the export environment and low growth in imports as aresult of restrained consumption, a current account deficit will be only small in 2025.

PolicyProposals

 Without further consumption tax hikes, sovereign default cannot be avoided.
 In the event of further consumption tax hikes, it is advisable that wages are raised and thestrain of increased tax payments on households is reduced. Wage increases are importantbecause they will ensure that Japan escapes from deflation.
 Utilization of human capital through greater support for female labor force participation, theefficient selection of public capital stock and development of ways to maintain and manage it
are also essential to support growth.
 Market access and improvement of the export environment through the conclusion of the TPP
is a prerequisite for economic growth. Corporate tax cuts are also necessary to increase
investment in Japan.
 The restriction of growth by energy concerns should be avoided through measures such as
more efficient use of energy through the promotion of power saving and clarification of thepositioning of nuclear power generation.

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40th Medium-Term Forecast:
2013-2025

Figure: Outlook for the Primary Balance and Current Account
2.0<Primary balance of Central and local government>(% of Nominal GDP)

<Current account>
6.0

Consumption tax rate 10％

1.0

5.0

Consumption tax rate 19％(Main Scenario)

0.0
-1.0

(% of Nominal GDP)
Forecast

4.0
3.0

Forecast

-2.0

2.0

-3.0

1.0

-4.0

0.0

-5.0

-1.0

-6.0

-2.0

-7.0

-3.0

-8.0

(F.Y.)

-9.0
2000

2005

2010

2015

2020

-4.0
2000
2025

Consumption tax rate 10％
Consumption tax rate 19％(Main Scenario)
2005

2010

2015

(F.Y.)
2020

2025

Sources: Ministry of Finance and BOJ“Balance of Payments”, Cabinet Office“System of National Accounts”

Table: Medium-Term Forecast of the Japanese Economy (2013FY-2025FY)
Indicator
Real GDP
Private final consumption expenditure
Private Non-Resi. Investment
Exports of Goods & Services
Imports of Goods & Services
Nominal GDP
Capital-output ratio (Public capital)1
Capital-output ratio (Private capital)2
Consumer Price Index
Compensation of employee per capita
Household savings rate ※Primary balance3 ※Outstanding debt4 ※Current accounts ※Unemployment rate
Crude oil price (WTI) ※World real GDP 5
CO2 emissions ※Unitgrowth rate, %growth rate, %growth rate, %growth rate, %growth rate, %growth rate, %ratio to GDP
ratio to GDP
growth rate, %growth rate, %%ratio to GDP
ratio to GDP
ratio to GDP%
dollars/barrel
growth rate, %Vs. 1990, %

2006
～10
0.2
0.5
-1.7
2.4
0.2
-1.0
1.5
2.4
-0.1
-1.1
2.5
-6.6
172.3
3.5
4.4
79.6
4.5
6.1

2011
～15
1.0
1.2
2.8
2.1
4.5
0.7
1.5
2.4
1.0
0.8
-2.0
-3.6
199.6
0.4
4.0
90.5
4.1
10.0

2016
～20
0.9
-0.0
2.8
3.8
2.3
1.4
1.5
2.5
1.5
1.1
-3.3
-1.1
202.0
0.1
3.4
121.2
3.7
6.5

2021
～25
0.7
-0.3
2.6
2.7
1.7
1.2
1.4
2.6
1.7
1.3
-5.0
0.8
199.9
-0.7
3.2
157.7
3.1
4.5

Notes: 1. Capital-output ratio (Public capital) = Real public capital stock (Gross)/Real GDP.
2. Capital-output ratio (Private capital) = Real private capital stock (Gross)/Real GDP.
3. Primary balance of central and local governments.
4. Outstanding debt of central and local governments.
5. World real GDP is an average weighted by exports from Japan.
6. All figures with ※ are those of the end year, the others are period average (growth rates are annualized).
Sources: Cabinet Office, “System of National Accounts”, Ministry of Internal Affairs and Communications, “Consumer Price Index”;“Labour Force Survey”; “White Paper on Local Public Finance”, Ministry of Finance, “Debt Management Report”,
Ministry of Finance and BOJ, “Balance of Payments”, IEA, “World Energy Outlook 2013 (Current Policies Scenario)”, IMF,
“World Economic Outlook”, The Institute of Energy Economics, Japan, “EDMC Energy Data Bank”

540th Medium-Term Forecast:
2013-2025

1.

Issues Facing Japan’s Economy
As is widely known, the Japanese economy is beleaguered by an aging population but, as though inconcert with this, the economy is also aging. This means a shrinking labor force due to population aging
and a rise in the average age of private and public capital stock.
If we examine capital first, the average age of the capital stock of private enterprises in Japan hasreached 16 years, while the average age of public capital stock is close to 20 years (Fig. 1-1). If
maintenance is neglected and nothing is done about the aging of capital stock, this will lead to a decline incompetitiveness and a decline in productivity. Additionally, new investment in existing stock has decreased
in relative terms and the growth rate of capital stock has also slowed, and the level of capital could pose
potential problems in the future.

Figure 1-1 The average age of public and private capital stock（Tril. yen)

800

Forecast

Public capital stock (Real)

700

(Age)
20
18

Average age (Right scale)

600

16

500

14

400

12

300

10

200

8

100

6

4
1970
75
80
85
90
95
2000
05
10 11
Note: Average age is estimated by JCER.
(F.Y.)
Sources: Economic Planning Agency, “National wealth survey”; Cabinet Office, “Estimates of Public Capital Stock”,“Quarterly Estimates of GDP”
0

1,400
1,200
1,000

(Tril.yen)（Age）

Capital stock of private Enterprises (Real)

18
16

Average age (Right scale)

14

800

12

600

10

400

8

200

6

0
1970
75
80
85
90
95
2000
05
Note: Average age ie estimated by JCER
Sources: Economic Planning Agency, “National Wealth Survey”; Cabinet Office, “Gross Capital Stock of
Private Enterprises”

1011(F.Y.)

4

Turning to the labor force, unless the labor force participation rate of the elderly improves, population
aging will lead directly to contraction of the labor force (Fig. 1-2). Contrary to expectations, the labor force
participation rate of people aged 65 and over has, if anything, fallen in the past 20 years.

640th Medium-Term Forecast:
2013-2025

Figure 1-2 Labor force and the average age of Japan’s population
69(Million persons)Year Average age
1980
33.9
1985
35.7
1990
37.6
1995
39.6
2000
41.4
2005
43.3
2010
45.0
2011
45.3

67
65
63
61
59
57
55
1980

85

90

95

2000

05

10
(F.Y.)Median age
32.5
35.2
37.7
39.7
41.5
43.3
45.0
45.3

12

Sources: Ministry of Internal Affairs and Communications, “Labour force survey”; National Institute of Population and Social
Security Research, “Population Statistics ”

Add to this the problem of the fiscal deficit. Prime Minister Shinzo Abe decided on October 1, 2013 toraise the consumption tax in April 2014, in accordance with legislation related to the Comprehensive
Reform of Social Security and Tax. However, this is literally just the first step along the road to fiscal
reconstruction, and consumption tax hikes that go beyond the legislation related to the Comprehensive
Reform of Social Security and Tax need to be sought. Based on the initial budget, in FY2013, national andlocal government tax revenues (43.1 trillion yen) will at last – for the first time in four years- exceed
income from issuing public bonds (42.9 trillion yen). This amount of public deficit is equal to around 9% of
nominal GDP. At the current consumption tax rate of 5%, the consumption tax revenue/nominal GDP ratiois 2.7% (FY2011) and even if the consumption tax rate increases to 10% as planned, tax revenues will, atbest, still account for only around 5% of GDP. By simple calculation, only when the tax rate reaches at least
three times its current level will it at last be possible to reduce the new issuance of public bonds to zero,and to improve the fiscal balance so that the balance of debt stabilizes, a considerable public burden will be
required in the future.
In this forecast, JCER verifies the strength of Japan’s economic fundamentals, and extracts issues to beaddressed in order to achieve both growth and fiscal reconstruction. More specifically, our examination
focuses on the following points:

If additional consumption tax hikes are made until fiscal default becomes avoidable, what level will
the consumption tax rate reach and what kind of changes will occur in the national economy as awhole?

Are Japan’s economic fundamentals strong enough to withstand further tax hikes? How will the labor
force, capital stock and productivity change?

Will a bold change in monetary policy by the BOJ lead to an exit from deflation in the medium term?



How will major changes in energy market trends such as energy saving and the shale revolution affectthe economy?

7

40th Medium-Term Forecast:
2013-2025

2.

Assumptions of Forecast
We estimated global economic trends using labor productivity growth trend and for China, we usedprojections that took into account a transition of growth phase into consideration. We used macroeconomic
models and input-output analysis to make simultaneous predictions about industry and the economy, andwe based our forecast for total factor productivity on the assumption of annual growth of 0.53%, a trend
obtained from data for1994- 2007. Details are as follows.
(1) Global economy and exchange rates
Doubts have started to spread about the high growth of emerging countries, which were previously theengines of global economic growth. Japan has made the transition from a high economic growth phase to astable growth phase and a low growth phase, and China, where per capita income has reached around
10,000 dollars in real terms, will also inevitably enter a low growth phase. It will be difficult to maintainhigh growth through the accumulation of capital as in the past, and China’s growth is expected to start toslow in the near future, like Japan 40 years ago and South Korea 20 years ago (Fig. 2-1).

Figure 2-1 The economic growth rate of Japan and Korea, and the assumption of growth rate
of China
20(yoy, %)
【Korea】1991/-4.6%

15
10
5
0
【Japan】1973/-6.0%
-5
Japan

Korea

60

65

(Year)

-10
1955
1956
16

70

75

80

85

90

95

2000

05

10

13

(yoy, %)

14

Forecast

12
10
8
6
4
2

Growth rate of China(Year)

0
1980
85
90
95
2000
05
10
15
20
25
Note: The boxes in the figure above show the year t where the slowdown in growth from (t-7) through t average to t
through (t+7) average was the biggest, and the difference in growth.
Sources: Cabinet Office, “System of National Accounts”; OECD; IMF, “World Economic Outlook”

8

40th Medium-Term Forecast:
2013-2025

However, due to economic recovery in the United States and expansion of the shares in the world
economy of emerging countries that achieve relatively high growth such as India and China, global
economic growth is likely to hover at around 3%, slightly higher than the 2000s’ average, when it was hit
by the Lehman crisis and ranged from 2.5% - 2.9%. Furthermore, Japan’s main export destinations includeacomparatively

large

numberofemerging

countries,

especiallyAsiancountries,

andJapan-export-weighted-world GDP growth is likely to be around 1% higher than world GDP growth for thetime being (Fig. 2-2).

Figure 2-2 The outlook of world economic growth rate(yoy,%)
8.0

Forecast

7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
World growth rate(weighted by GDP)
World growth rate(weighted by exports from Japan)

-1.0
-2.0

1980
1985
1990
1995
2000
2005
2010
2015
Sources: IMF, “World Economic Outlook”; Ministry of Finance, “Trade Statistics of Japan”

2020

2025
(Year)On the other hand, Japan’s economic growth rate will be around 1%, as explained later, and Japan’s sharein the world economy will continue the downward trend that began in the late 1990s (Fig. 2-3).

Figure 2-3 Share of world GDP by country and region
Forecast

(%)
100

80

60

40

20

0
1980

1985

1990

1995

OthersNorth America
Middle East & Africa
Note: GDP at market exchange rates
Source: IMF, “World Economic Outlook”

2000

2005

Oceania
NIEs
EU

9

2010

2015
2020
2025
(Year)
Rest of Asia
Central & Southern America
China40th Medium-Term Forecast:
2013-2025

Also, this forecast reflects a difference in prices between Japan and the United States after sustained
depreciation of the yen against the dollar due to bold monetary easing, and assumes that nominal rates willrise modestly, helping restore purchasing power parity (Fig. 2-4).

Figure 2-4 Nominal and real exchange rate
300

(yen/dollar)
Forecast

250
200
150
100
50
Real exchange rate

Nominal exchange rate

0
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
(F.Y.)
Note: Real exchange rate=Nominal exchange rate×(U.S.: PPI/Japan: CGPI)
Sources: The Nihon Keizai Shimbun; The Bank of Japan, “Corporate Goods Price Index”; U.S. Bureau of Labor Statistics(2) Labor force
For population by age, we used the medium variant projections of the National Institute of Populationand Social Security Research. For labor force participation rates, we assumed that the labor force
participation rates for each age group would remain the same as the FY2012 level for men and would
gradually increase for women. However, it is inevitable that the labor force participation rate will fall
overall because the elderly, who have a low labor force participation rate, will come to account for a larger
share of the population, and as a result, labor force growth will be -0.6% in the early 2010s, -0.4% in thelate 2010s, and -0.6% in the early 2020s.
(3) Energy supply
We assumed that nuclear power plants would be decommissioned after 40 years in operation, and weanticipate that nuclear power plants with less than 10 years’ lifetime remaining as of FY2013 will not be
brought back into operation. Also Fukushima Daiichi Nuclear Power Plant and Fukushima Daini Power
Plant operated by Tokyo Electric Power Company are expected to be decommissioned. It is assumed that
other nuclear power plants will gradually be brought back into operation from now through FY2016 andwill be taken offline as soon as 40 years have passed.
(4) Fiscal policy(i)
Tax system and social insurance
Our forecast is based on assumptions such as the following:Consumption tax rate：Raised to 8% in April 2014 and to 10% in October 2015. The rate will then beraised in annual increments of 1% from FY2017, reaching 19% in FY2025. (Details are explained in“3. The need for further tax increases.”10

40th Medium-Term Forecast:
2013-2025

Welfare pension insurance premiums: Raised in annual increments of 0.354%, reaching 18.3% from
FY2017



Welfare pension income replacement rates: Expected to fall by around 0.6% points a year on average,
due to macroeconomic slide, etc., from 65% in FY2009 to around 55% in FY2025.

Insurance share of payment of medical care and nursing care expenses: Unchanged (the residual isborne by national/local government)

Corporate tax rate （effective tax rate）：36.1％（From FY2014）(ii)
Government investment
 The National Resilience Plan states that investment of around 200 trillion yen should be made over the
coming 10 years, but this includes private-sector investment and, judging from the budget bill thatreflects this plan, it may not expand current government investment including reconstruction costmuch further. Although expansion in replacement costs is anticipated in the future, there is likely to bea lack of finance for expanding government investment further and we expect that, from FY2017,
government investment will remain at the same level as FY2010 in real terms because reconstruction
demand will settle temporarily.

1140th Medium-Term Forecast:
2013-2025

3.

The need for further tax increases(1) Increasing burden of medical and nursing care expenses, and tax hikes
As mentioned earlier, Japan’s fiscal situation is already serious and it is expected to deteriorate further inthe future. Let us try to forecast trends in medical care expenses and nursing care expenses, which are oneof the main causes of this situation.
We forecast the spending based on demographic changes by age group, having extended the upward
trend line of medical care expenses and nursing care expenses per capita by age group seen in the past 5
years (excluding 2011 when the Great East Japan Earthquake occurred). The results showed significant
increases in both national medical care expenses and national nursing care expenses with national medicalcare expenses rising from 38.6 trillion yen in FY2011 to 59.2 trillion yen in FY2025 and national nursing
care expenses climbing from 7.9 trillion yen in FY2011 to 14.2 trillion yen in FY2025 (Fig. 3-1, 3-2).
While further rationalization is essential, improvement of wages in the nursing care labor market is also an
issue, and there is no easy answer.

Figure 3-1 National medical care expenditure
70(Tril. yen)
Forecast

60
50
40
30
20
10
0

2005
2010
2015
Source: Ministry of Health, Labour and Welfare, “National Medical Care Expenditure”

2020

2025
(F.Y.)

Figure 3-2 National long-term care expenditure(Tril. yen)
16
14
12

Forecast

10
8
6
4
2
0
2005
2010
2015
2020
Source: Ministry of Health, Labour and Welfare, “Benefits of Long-term Care Insurance”

12

2025
(F.Y.)

40th Medium-Term Forecast:
2013-2025(2) Changes in the primary balance and the size of tax hikes
Given Japan’s current economic growth capacity, substantial tax hikes are required to prevent the balanceof government debt from rising and it will be impossible to turn the primary balance positive through therecently confirmed move of increasing the consumption tax rate to 10% alone.
Fig. 3-3 shows how the primary balance would change assuming that the tax system as currently planned
remains in place. The primary balance would still not have moved into positive territory by 2020, and there
would be no narrowing of the deficit thereafter. This is because the population in their prime working ages
will decline while the number of elderly will continue to increase and so tax revenues will show slow
growth as expenditures keep on rising.
Fiscal reconstruction also has the effect of stopping the current account deficit from becoming serious.
Under the main scenario where Japan aims for fiscal reconstruction, the current account deficit is only
small in FY2025. Under the scenario where Japan does not pursue fiscal reconstruction, the current accountbalance turns negative in the late 2010s and the deficit continues to widen, reaching 3% of GDP in FY2015(Fig. 3-4). In this case, Japan’s position would no longer be sustainable in the context of external, as well asinternal economy.

Figure 3-3 The primary balance of central and local government
2(% of Nominal GDP)1
0
-1

Forecast

-2
-3
-4
-5
-6
Main Scenario-7-8

Scenario in which consumption tax remains 10％
-9
2000
2005
2010
2015
2020
2025
(F.Y.)
Source: Cabinet Office, “System of National Accounts”, forecast by JCER

Figure 3-4 Current account balance of Japan’s economy
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0

(% of Nominal GDP)
Forecast
Consumption tax rate 10%
Consumption tax rate 19%(Main Scenario)

2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25(F.Y.)
Sources: Ministry of Finance; BOJ, “Balance of Payments”; Cabinet Office, “System of National Accounts”

13

40th Medium-Term Forecast:
2013-2025

Consequently, the consumption tax rate needs to be raised further and, in this medium-term forecast, we
assumed that the tax rate would be increased in annual increments of 1% from FY2017 at least throughout
the period of the forecast (until FY2025), reaching 19% in FY2025. However, such tax hikes would put
enormous strain on household budgets. If we look at household budgets according to the system of national
accounts, the savings rate is already on the verge of turning negative and this is bound to bring uncertainty
to the consumption outlook. In the following sections, we check whether demand side GDP which iscomposed of consumption, investment, government expenditure and net exports could withstand further tax
increases and grow and if so, what conditions would be required for this.
(3) Sovereign default and the cost of Greece default
The strain of further tax increases is, of course, something everyone - especially the entities that will betaxed - would like to avoid but, now that Japan’s government debt has ballooned to a level way surpassingthat of other advanced countries, fiscal reconstruction to avert a crisis is a cost that must be shouldered inview of the enormity of the cost should Japan fall into fiscal crisis. Under the main scenario of raising theconsumption tax rate to 19% by FY2025, a rise in the total government debt/GDP ratio can be prevented.
Under the scenario of keeping the consumption tax rate at 10%, total government debt will continue toexpand further to over double GDP (Fig. 3-5).
Let us try comparing the data of Greece, which fell into a severe fiscal crisis, with OECD average data
and Japan data. In all three cases (Japan, OECD average data and Greece), real GDP per capita peaked in2008 around the Lehman shock and then fell (Fig. 3-6). While it had almost recovered by 2012 in the caseof the OECD average and Japan, in Greece’s case it was still 20% below the peak level. If we look at
unemployment data, the situation is even more severe, as Greece’s unemployment rate more than tripled,rising from 7.7% in 2008 to 24% in 2012 (Fig. 3-7). This level is almost the same as the unemployment ratein the United States at the time of the Great Depression (23.4% in 1933). Japan needs to pursue fiscal
reconstruction so that it does not put such an intense strain on future generations.

Figure 3-5 Economic indicators in an alternative scenario where consumption tax remains
10%
Real GDP growth rate
Main Scenario
2011-15

Nominal GDP growth rate

No tax hike

0.97

Main Scenario

No tax hike

0.71

Real consumption
Main Scenario

CPI(All items)

No tax hike

1.17

Main Scenario

No tax hike

0.97

2016-20

0.91

1.26

1.37

1.40

-0.01

0.74

1.55

1.01

2021-25

0.74

0.89

1.21

1.20

-0.31

0.22

1.68

1.35

Household savings rate*
Main Scenario
2011-15

No tax hike

-1.97

Primary balance(% of GDP)*

Government debt(% of GDP)*

Current account(% of GDP)*

Main Scenario

Main Scenario

Main Scenario

No tax hike

-3.55

No tax hike

199.6

No tax hike

0.42

2016-20

-3.33

-2.62

-1.14

-2.80

202.0

206.4

0.13

-0.73

2021-25

-4.96

-3.49

0.77

-2.90

199.9

219.0

-0.71

-2.96

Note: Growth rate are annualized averages. * are those of the end year14

40th Medium-Term Forecast:
2013-2025

Figure 3-6 Real GDP per capita (Greece, Japan and OECD average)(U.S. dollar)
35,00030,00025,00020,00015,000Japan

10,000

Greece5,000

OECD average

0
2000
01
02
03
Note: Constant PPPs
Source: OECD, “Economic Outlook”

04

05

06

07

08

09

10

11

12
(Year)

11

12(Year)

Figure 3-7 Unemployment rates (Greece, Japan and OECD average)
30
25
20
15

(%)
Japan
GreeceOECD average

10
5
0
2000
01
02
03
Source: OECD, “Economic Outlook”

04

05

06

15

07

08

09

10

40th Medium-Term Forecast:
2013-2025

4.

Strength of fundamentals on the demand side(1) Wages, prices and interest rates
Corporate profits that influence wages are at a high level
Major factors in determining the consumption trend are trends in household income and consumer prices.

First, let us look at corporate earning capacity, to examine wages, which account for a large portion ofhousehold income. The ordinary profit of Japanese corporations has returned to a high level (Fig. 4-1).
Equity ratios are also high (Fig. 4-2) and Japanese corporations can currently be said to have a level of
earning capacity comparable with pre-Lehman levels.

Figure 4-1 Ordinary profits of enterprises (Seasonally adjusted series)
18（Tril. yen）

16
14
12
10
8
6
4
2
0
1985:290:2
95:2
2000:2
Source: Ministry of Finance“Financial Statements Statistics of Corporations”

05:2

10:2

13:4
（Quarterly）

Figure 4-2 Ratio of net worth of enterprises
40

(%)

35
30
25
20
15
10
5
0
1960
65
70
75
80
85
90
95
2000
05
Note: Ratio of net worth = (Net assets - Subscription rights to shares) / (Liabilities and capital) ×100
Source: Ministry of Finance, “Financial Statements Statistics of Corporations”

10 12(F.Y.)

For workers to move to the nursing care sector, working conditions need to improve
There will also be upward pressure on wages in the medium term. In the nursing care sector, the labor
supply-demand balance is already tight and, for employment to expand in this sector in the future, newworkers need to be attracted to the sector and held, and for this to happen, improvement in the level ofwages and treatment is needed (Fig. 4-3). Also, this sector has always had a large proportion of female
employees. Therefore, improvement of working conditions in the nursing care sector is likely to contribute16

40th Medium-Term Forecast:
2013-2025

to raising the average wage for women.
The tight labor supply-demand balance in the nursing care sector is also an argument for demanding
expansion in the immigrant labor force. The acceptance of immigrant labor is also expected to serve as adriving force promoting domestic globalization in Japan.

Figure 4-3 The outlook for long-term care labor demand and supply(Million persons)250
Care labor demand

Optimistic Scenario：labor shortage of
150 thousand persons

Care labor supply(Optimistic Scenario)
Care labor supply(Pessimistic Scenario)

200

Forecast

150

Pessimistic Scenario：labor shortage of
860 thousand persons

100

labor participation rate
care employment/ total industry
15～29
woman
over 60
58.3％
47.5％
29.2％
2.1％
58.4％
45.1％
25.1％
2.1％
61.7％
50.0％
30.1％
3.1％

<Assumptions by Scenario＞

50

2011F.Y.
Pessimistic Scenario
2025F.Y.
Optimistic Scenario

0
2000

01

02

03

04

05

06

07

08

09

10

11

25
（F.Y.）
Sources: Ministry of Health, Labour and Welfare; Care Work Foundation; The Japan Institute for Labour Policy andTraining; National Institute of Population and Social Security Research…

Promotion of the use of women and the elderly will happen in parallel with improvement in wages
Elimination of the M-shaped curve that characterizes the labor force participation rate of women andcontinued employment of the elderly are expected to happen in parallel with improvement in the
productivity and wages of women and the elderly. This is because, among women and the elderly, the levelof the last academic institution attended is higher in the younger age groups. Research results have also
been published showing that when elderly people work, their health improves 1 , and promoting theemployment of elderly people is a policy with value above and beyond its effect on pension finance.
Prices will rise but will not reach the 2% target
Turning to the consumer price trend which may affect wages and consumption, consumer prices are also
likely to start rising due to a narrowing of the supply-demand gap brought about by monetary policy andeconomic recovery, and the consumption tax hikes (Fig. 4-4). However, further consumption tax hikes will
have the effect of suppressing consumer expenditure on the one hand and widening the supply-demand gap.
Consequently, it is forecasted that consumer price inflation will be limited and, in the period from FY2015
to FY2025, inflation – even including the effect of the consumption tax hikes -will not exceed the BOJ’s
price stability target of 2%.
The rise in nominal interest rates will be curbed and, as a result, real interest rates are expected to remain
1

For example, Kuhn et al. (2010) “Fatal Attraction? Access to Early Retirement and Mortality,” IZA Discussion Paper No.
5160 reports the finding that in the case of Australian men, retiring one year early shortens life by 1.8 months. The cause inaround one third of cases is an increase in smoking and alcohol intake.

17

40th Medium-Term Forecast:
2013-2025

at a low level. The fact that issuance amount of JGBs will decrease as fiscal reconstruction progresses isalso likely to ease the upward pressure on long-term interest rates.

Figure 4-4 Inflation and nominal interest rate
10

(%)

8
Forecast

6
4
2
0
-2

Long-term(10y)JGB yield
Consumer Price Index(yoy)

-4
1980
1985
1990
1995
2000
2005
2010
2015
2020
Sources: The Nihon Keizai Shimbun; Ministry of Internal Affairs and Communications, “Consumer Price Index”

2025(F.Y.)Tax credit for salary growth
Wage increases are also being given a boost by policy measures. In October 2013, the government
further extended the tax credit for salary growth, which it only introduced in April, and if a company raises
the wages of regular employees by 2% or more, it is now eligible for a tax credit equal to a certain
percentage of the wage increase.2 The sense of an employment shortage is also increasing and conditions
conducive to wage increases are being created.
Regular pay hikes will not lead to increased wages
On the other hand, when we examined how the wage income of the household budget would change as aresult of future changes in the demographic structure and changes in the industrial structure assuming that
there will still be no change in wages for different sectors and for different genders and ages in the future,
we found that although the wage income of the household budget would increase slightly overall (Fig. 4-5),
largely because the percentage of women engaged in industries with higher wages would increase, the rateof increase would be less than 0.1% on an annualized basis. In the current situation, wage raises throughregular pay hikes, where pay increases in line with age-based wages of each company, are not enough on
their own to push up wages on a macroeconomic scale.

2

A tax credit of 10% of the pay increase is awarded, limited to 10% of the company’s corporate tax liability (20% in the caseof SMEs).

18

40th Medium-Term Forecast:
2013-2025

Figure 4-5 The increase in estimated average earnings due to the industrial structure anddemographic change when earnings by industry, gender and age are fixed(Thousand yen)
3,700
3,600
3,500
3,400
3,300
3,200
3,100
3,000
2010
15
20
25
Sources: Ministry of Health, Labour and Welfare, “Labour Force Survey”, “Basic Survey on Wage Structure”(Year)

Ideally, wage hikes should be given to minimize the reduction in the real value of household income
resulting from the consumption tax hikes. However, if we look back over the past 20 years, we see that,even in the mid-2000s, when the labor market was fairly tight, the per capita compensation of employees
did not increase. It is predicted that, unless there is a change in corporate wage setting behavior or severe
tightening of the labor supply-demand balance, wage growth is unlikely to exceed consumer price inflation(Fig. 4-6). We would like to see some effort on the part of labor and management.

Figure 4-6 Compensation of employees per capita
8.0(yoy, %)

6.0
Forecast
4.0
2.0
0.0
-2.0
Compensation of Employees per capita
-4.0
1980
1985
1990
1995
2000
2005
2010
2015
2020
Sources: Cabinet Office, “System of National Accounts”; Ministry of Internal Affairs and Communications,“Labour Force Survey”

2025(F.Y.)(2) Consumption and household savings – Household savings will move into negative territory
Due to aging, consumption tax hikes and per capita compensation growth that is lower than inflation, thehousehold savings rate, which is already near to zero, is expected to move into negative territory in the
future (Fig. 4-7). Measures for people with low incomes such as the introduction of the making work pay
tax credit will no doubt become essential.

19

40th Medium-Term Forecast:
2013-2025

Figure 4-7 Household saving rate
4.0

(%)

3.0

Forecast

2.0
1.0
0.0
-1.0
-2.0
-3.0

Household savings rate

-4.0
-5.0
-6.0
2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Source: Cabinet Office, “System of National Accounts”

2021

2023

2025
(F.Y.)As explained above, inflation will exceed income growth, and it is difficult to imagine that household
budgets, which are turning negative, will give a big boost to consumption. Consumption is, at best,
expected to remain within the same range (Fig. 4-8).

Figure 4-8 Real private final consumption expenditure
6.0(yoy, %)

5.0
4.0

Forecast

3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0

Private final consumption expenditure per capita
Private final consumption expenditure

1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
Sources: Cabinet Office, “Cabinet Office”; Ministry of Internal Affairs and Communications, “Population Estimates” (F.Y.)(3) Investment – Private-sector investment will increase steadily
As explained above, corporate earnings have improved, and, on the funding (capital) side, conditions are
becoming more conducive to investment. Since, in the Japanese economy as a whole, the savings rate willrise due to the consumption tax hikes, real interest rates will be kept down and the investment climate on
the cost side will also improve. The export environment will also pick up and private sector investment islikely to increase steadily. However, since the amount of overseas investment will expand and growth indomestic private-sector consumption will be limited, there will also be a limitation on investment growth(Fig. 4-9, 4-10).

20

40th Medium-Term Forecast:
2013-2025

Figure 4-9 Growth rate of real private investment
25(yoy, %)
Private non-residential investment20
15

Forecast

10
5
0
-5
-10
-15
1980
1985
1990
1995
2000
Source: Cabinet Office, “System of National Accounts”

2005

2010

2015

2020

2025
(F.Y.)

Figure 4-10 Overseas investment(Tril. yen)
120
100

(%)

Overseas investment

Forecast

20
18

Real private non-resi. investment

16

Foreign investment ratio (Right scale)

14

80

12
10

60

8
40

6
4

20

2
0

0
1986
90
95
2000
05
10
15
20
Sources: Cabinet Office, “System of National Accounts”; Ministry of Economy, Trade and Industry,“Survey of Overseas Business Activities”

25(F.Y.)(4) Net exports – The export environment will improve due to the correction of the strong yen
If household consumption will, at best, stay within the same range and there are limitations on
investment growth, as explained above, unless net exports expand to a considerable degree, economic
growth cannot be expected due to constraints on the demand side. The world economy as a whole isexpected to expand steadily compared with the 2000s when the Lehman collapse occurred, and the export
environment in Japan can improve accordingly.
In particular, the correction of the strong yen will significantly improve the corporate earning
environment, and recovery in price competitiveness is likely to bring about expansion in corporate exports.
However, in the long term, forces that will restore purchasing price parity are likely to kick in (Fig. 2-4).
Meanwhile, on the imports side, changes in energy prices will play an important role. Although somenuclear power plants are expected to be brought back into operation, operations will not return to theirformer level and so the amount of imports of fossil fuels for power generation will increase and the deficit
trend of the trade balance is likely to continue. Also, while the shale revolution that started in the UnitedStates spreads and fossil fuel supply capacity increases worldwide, global crude oil demand will grow due
to factors such as global economic growth and the suspension of nuclear power generation in Japan (Fig.

21

40th Medium-Term Forecast:
2013-20254-11). The resource prices Japan has to contend are likely to rise in the medium term, with no major pricecollapse anticipated (Fig. 4-12). However, we believe that crude oil prices will be around 40 dollars a barrel
cheaper in 2025 than forecasted last fiscal year (estimated at 197 dollars in 2025 last fiscal year). With
regard to the shale revolution, forecasts vary widely and it is necessary to prepare for various scenarios and,in this forecast, we conduct simulations based on different crude oil price assumptions in the section called“7. Energy and CO2.”

Figure 4-11 Global crude oil demand
4.0(yoy%)
Forecast

3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
1995
2000
NIEs4
North America
China
Total
Source: EIA, “Oil Market Report”

2005

2010
ASEAN5Japan
Central & Southern America

2015

2020
India
EU
Oceania2025(Year）

Figure 4-12 The forecast of oil price
180
160
140

171

($ per barrel)
Forecast by JCER
Forecast

IEA(published in November 2013)

144
157.7

120
121.2

100
80

90.5

60
40
20
0
2000
2005
2010
2015
2020
Sources: The Nihon Keizai Shimbun; IEA, “World Energy Outlook 2013 (Current Policies Scenario)”

2025(Year)

The conclusion of the TPP being pushed by the Government may have a significant impact on the
agriculture, forestry and fisheries industry. Although conditions are still under negotiation at the present
time, according to the estimates published by the Cabinet Secretariat, over a 10- year period, real GDP is
expected to improve 0.66% and exports and imports are expected to increase 2.6 trillion yen and 2.9 trillion
yen respectively (Fig. 4-13).
While the impact on the growth rate will be limited, the effect of the TPP is a change of level, which
when enjoyed over the long term will bring major economic benefits. At a time when Japan must urgently
develop new export industries and improve the competitiveness of existing industries to maintain growthpotential, participation in the TPP is undoubtedly an important move. In terms of exports, Japan’s terms of22

40th Medium-Term Forecast:
2013-2025

trade will improve if it becomes possible to import relatively cheap natural gas from the United States3.
As a little-discussed aspect, the TPP will have the effect of correcting the disparity in income levels. The
elimination of tariffs in the agriculture sector can be expected to reduce the expenditure of elderly people
with low incomes by lowering food prices especially rice prices.

Figure 4-13 The effect of TPP (Cabinet Secretariat trial estimates)(Contribution to GDP growth by eliminating tariffs, %)1.5
1.0
Total (3.2 Tril. yen)
0.5
0.66

0.61

Consumption(3.0 Tril. yen)

0.09

Investment(0.5 Tril. yen)

0.55

0.0
-0.60
-0.5

Exports(2.6 Tril. yen)
Imports(-2.9 Tril. yen)

-1.0
Source: Cabinet Secretariat

Thus, due to factors such as low growth in imports attributable to further consumption tax hikes, theupturn of the export environment and the curbing of fossil fuel imports through energy efficiency
improvements, in reals terms, net exports will expand. The widening of the deficit of the trade balance,
which is measured in nominal terms, will only be modest and the scenario where the current accountbalance moves deeper into deficit will be averted (Fig. 4-14). On the other hand, if the government stops
making any more consumption tax hikes with the rate at 10%, the current account balance will soon moveinto the red as imports increase due to growth in internal demand and the deficit will widen.

Figure 4-14 The forecast of current account balance
40
30
20

(Tril. yen)
Current transfers
Trade and services balance

Income balance
Current account balance

Forecast

10
0
-10
-20
-30

2000
05
10
15
20
Source: Ministry of Finance and Bank of Japan, “Balance of Payments Statistics” forecast by JCER

3

25
(F.Y.)

Exports of natural gas from the United States are subject to a permitting system, and to obtain a permit to export LNG to a
non-FTA country, it is necessary to go through certain procedures until it is judged that it is in the public interest. As of
November 2013, two projects had been approved to export to Japan.

23

40th Medium-Term Forecast:
2013-2025

5.

Strength of fundamentals on the supply side
The size of a country’s economy is measured by domestically produced gross added value = GDP, andthe source of this added value is divided into two parts called factors of production: labor and capital. The
strength of the fundamentals of growth depends how much labor a country has, how much capital it has,and how high its capital and labor productivity is.

(1) The labor force will shrink
Looking at changes in the labor force, the labor force is expected to be smaller in 2025 than in 2012 due
to decline in the working age population. With the aging of the population, the labor force participation rate
will fall. Moreover, the labor force will age (Fig. 5-1). The number of children that will be part of theworking age population by 2025 is already determined and the only way to increase the labor force
population is to make use of women and the elderly and to actively bring in immigrants.

Figure 5-1 The outlook of labor force and its age profiles
140(Million persons)【Labor force by age group】

100％

Forecast

Male

Female

120
80％
100
60％
80

60

40％

40
20％

Non Labour force
20

Labour force
Total population（Year）

0％2012

01990 1995 2000 2005 2010 2015 2020 2025
Sources: Ministry of Internal Affairs and Communications,“Population Estimates”, “Labour Force Survey”

25 (Forecast)2012

25 (Forecast)over 65

60-64

55-59

50-54

45-49

35-39

30-34

25-29

20-24

15-19

40-44

(2) Capital will increase steadily
On the other hand, the factors that determine the current level of capital stock (gross capital stock)4 that
4

According to "Japan’s Public Capital Stock 2012" published by the Director-General for Policy Planning of the Cabinet
Office, there are three ways of measuring capital stock: gross capital stock, which is the stock of assets surviving from past
investment and re-valued at the purchasers prices of new capital goods of a reference period, net capital stock, which is thestock of assets surviving from past periods, and corrected for depreciation, and productive capital stock, which reflects
current productive capacity. From a productive capacity perspective, productive capital stock should be used but here gross24

40th Medium-Term Forecast:
2013-2025

is input into production is the existing capital stock that is still usable (existing capital stock less capitalstock which needs updating) and newly added capital stock(= investment). The source of funding for thisinvestment is savings, and the savings rate is a factor that influences changes in capital stock over the longterm. The factors that determine the macro savings of a country are the savings of the household sector, thecorporate sector and the government sector. The macro savings rate has been falling for the past 20 years
because the savings rate is declining in the household sector mainly due to aging and has been consistently
negative in the government sector. However, the macro savings rate may start to stabilize in the future
because the government sector deficit will narrow due to the consumption tax hikes (Fig. 5-2).

Figure 5-2 Saving rate of total economy
40

(%)

35

Forecast

30
25
20
15
10
5

Saving rate of total economy

0
1980
1985
1990
1995
2000
2005
2010
2015
2020
Note: Saving rate of total economy = (Nominal GDP-Private final consumption expenditure -Government final
consumption expenditure) /Nominal GDP×100
Source: Cabinet Office, “System of National Accounts”

2025(F.Y.)

This trend is likely to push up investment and contribute to an increase in capital stock. It will bepossible to keep long-term interest rates at a low level because government bond issues will be curbed dueto the reduction of the fiscal deficit. Recently, consumption of fixed capital has increased in relative terms
but if the fiscal deficit is successfully reduced, this will serve as a spur for investment, and an increase infacilities and equipment per capita will be possible in the medium and long term.
To use the Solow growth model, theoretically, in the long-term, while the marginal productivity ofcapital gradually decreases as a result of capital accumulation, fixed capital consumption expands inproportion to the accumulated capital. Therefore, at a certain point, new investment and fixed capitalconsumption counterbalance each other, and the economy will enter a balanced growth state5. In this case,the capital coefficient converges to a constant. If we look at Japan’s capital coefficient (Fig. 5-3), we seethat it is around 2.5 times GDP and has actually stabilized, suggesting that Japan has entered a balanced
growth state. If the decline in the savings rate continues, a decline in the capital coefficient is feared, but thecapital coefficient could be kept stable through a halt in the decline of the savings rate.

capital stock is used mainly because it is difficult to estimate the future efficiency of capital stock.
5
Situation where economic growth, capital growth and effective labor (labor including improvements in productivity due toadvances in technology) are all consistent. Occurs when capital per unit of effective labor converges.

25

40th Medium-Term Forecast:
2013-2025

Figure 5-3 Capital-output ratio6 (Gross private capital/Real GDP)
3.0

(capital-output ratio)
Forecast

2.5
2.0
1.5
1.0
capital-output ratio
0.5
0.0
1980
1985
1990
1995
2000
2005
2010
2015
2020
Note: capital-output ratio = Real private capital stock (Gross) / Real GDP
Sources: Cabinet Office, “System of National Accounts”, “Gross Capital Stock of Private Enterprises”

2025(F.Y.)

Collaboration with public capital stock development has also become a major issue. Technology
development to efficiently meet new infrastructure demand in response to technology innovation, such as
stands for the widespread use of fuel cell vehicles, is also required. To promote efficient improvements
through overseas cooperation and the introduction of technology from overseas, it is necessary to breakthrough capital and regulatory barriers. Participation in the TPP is expected to powerfully promote this. In
terms of expanding new investment in Japan, measures such as lowering the corporate tax rate, which is set
at a higher level than other countries, are also important (Fig. 5-4).

Figure 5-4 Comparison of corporate tax rates
60(%)
Malaysia
Phillipines
BrazilChina

50Singapore
Korea
Hong Kong
TaiwanVietnamBangladeshIndonesia
Thailands
India

40
30
20
10

Japan
U.S.
UK
France12 1993 96 99 2002 05
1993 96 99 2002 05 08 11
Source: KPMG, “Corporate and Indirect Tax Survey”

08

12
11

1993 96

99 2002 05

08

11
12
(Year)(3) Other production factors
Other factors that determine the production level of the economy as a whole include public capital stock,knowledge-based capital stock and human capital stock7.
6Gross capital stock is estimated assuming removal rate remains around 4%.
For public capital stock, since an income distribution for contribution to production does not exist, contribution to
expansion in productive capacity is often taken as contribution to productivity. Also for knowledge-based capital stock and726

40th Medium-Term Forecast:
2013-2025(i) The capital stock to GDP ratio will remain at the current level
Without public capital such as roads and sewerage systems, the productivity of private capital would beseverely limited. Until the late 2000s, Japan spent a large proportion of its GDP on public fixed capitalformation compared with other advanced countries, and accumulated public capital stock. As a result, grosspublic capital stock exceeds 140% of GDP, and is likely to remain more or less at the current level until
2025 （Fig. 5-5）.
However, it is forecasted that, from 2025, investment to update public capital stock will further increase,and Japan will be unable to afford the updating costs unless it increases its budget for the formation of
public fixed capital. If Japan tries to cope by postponing the updating of public capital stock, unless it candelay updating around 13 years on average, under the budget currently being envisaged, updating costs will
be unaffordable by 2050 (Fig. 5-6, 5-7). The circumstances vary for each individual item of capital stock,
but this is a fairly impossible scenario and Japan has no choice but to carefully sort out to some degree
which of the capital stock is to be updated. To do this, it needs to formulate a long-term vision for efficient
capital stock development including compact cities and to incorporate a broad range of initiatives
harnessing private sector expertise and capital such as PPP/PFI.

Figure 5-5 Public capital-output ratio
1.6(capital-output ratio)

Forecast

Public capital-output ratio
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
1980
85
90
95
2000
05
10
15
Note: Public capital-output ratio = Real public capital stock (Gross) / Real GDP
Sources: Cabinet Office, “Estimates of Public Capital Stock”, “Quarterly Estimates of GDP”

20

25
(F.Y.)

human capital stock, a distribution based on contribution to production is included in corporate income and employeecompensation respectively and while it is clear that economic value exists, there is no consensus among economists on themethod used to measure contribution to productive capacity, and in many cases, it is handled as contribution to improvementin productivity.

27

40th Medium-Term Forecast:
2013-2025

Figure 5-6 The forecast of public capital investment and retirement(Tril. yen, Chained (2005) prices)35
Public investment

30

Retirement25
Forecast

20
15
10
5
0

1953
60 65 70 75 80 85 90 95 2000 05 10 15 20 25 30 35 40 45 50(F.Y.)
Note: Retirement is estimated from past investment
Sources: Cabinet Office, “Estimates of Public Capital Stock”, “Quarterly Estimates of GDP”; Ministry of Internal Affairs
and Communications , “Report on Administrative Investments”

Figure 5-7 Replacement timing would be about 13 years behind under the constraint of budget
35(Tril. yen, Chained (2005) prices)
Public investment

30

Retirement25

Forecast

20
15
10
5
0
1953

60

65

70

75

80

85

90

95 2000 05

10

15

20

25

30

35

40

45

50
(F.Y.)

Note: Retirement here is assumed that the useful life is 13 years longer than the standard assumption
Sources: Cabinet Office, “Estimates of Public Capital Stock”, “Quarterly Estimates of GDP”; Ministry of Internal Affairs
and Communications, “Report on Administrative Investments”

The development of efficient maintenance and management techniques and selection methods for capitalstock is a burning issue. It is neither realistic nor advisable to maintain and update all existing public capitalstock.
Public capital infrastructure investment varies significantly from region to region. In the case ofprefectures such as Hokkaido, Shimane, Akita and Kochi, figures per prefectural citizen show that a
particularly large amount of investment has been made. It has to be said that, with tight budget conditions,infrastructure maintenance is a major issue for these local governments.

28

40th Medium-Term Forecast:
2013-2025(ii)
The level of human capital stock is highThe importance of human capital, including education and vocational training, as a factor of productionof economic activity has long been pointed out. Human capital can be described as the economic value ofthe outcome of education and vocational training. As in the case of general capital where interest income
increases, the more financial capital is available, so in the case of human capital a similar relationship can
be considered to exist and income gain will also increase, the more human capital is available. However, ingeneral, human capital is difficult to measure and is estimated in international comparisons based on datasuch as trends in income by education. An international comparison based on tertiary graduation ratio
reveals that Japan ranks third among the compared OECD member countries for the age range 25-64. Also
for the younger 25-34 years age group, Japan does well, ranking second behind South Korea. The results
suggest that the level of Japan’s human capital stock is high (Box 1).

Figure 5-8 Percentage of population that has attained tertiary education (2011)
(%)
70

25-34

25-64

60
50
40
30
20
10
0

e
g
a
dg
sd
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s
rR
t
CB
CJ
DOE
K
NUI
AMCS
NL
NS
TI
B
F
PGHGS
SPI
SFUAI
Source: OECD（2013）“Education at a Glance 2013: OECD indicator”(iii)
Knowledge-based capital - insufficient investment in ICT and competitiveness
The OECD analyzed the importance of knowledge-based capital as a source of future economic growthand conducted an international comparison. Knowledge-based capital investment is investment inintangible assets and refers to investment such as IT investment (software, databases), R&D investment(patents, copyright, trademark rights, designs), and investment to increase competitiveness (brand and asset
value, entrepreneurial human capital, human and organizational networks, organizational knowhow).
If we look at the relationship between knowledge-based capital investment as a percentage of added
value (density of knowledge-based capital investment) and per capita GDP, we see that there is a positive
correlation, and this finding is consistent with the claim that knowledge-based capital investment plays animportant role in productivity (Fig. 5-9).

29

40th Medium-Term Forecast:
2013-2025

Figure 5-9 Investment intensity in knowledge based capital and GDP per capita(GDP per capita, U.S. dollar)
50,000U.S.

45,000Australia

40,000SwedenBelgiumUK

Germany
Finland35,000

Japan

Italy

30,000Denmark

Netherland

Austria

IrelandFranceSpain
GreecePortugal

25,00020,000

0
2
4
6
8
10
12
14
16
Note: GDP per capita is as of 2011
Knowledge based capital investment (% of value added)
Source: OECD(2013) “Supporting Investment in Knowledge Capital, Growth and Innovation”

The OECD has pointed out that although Japan ranks highly in terms of R&D investment, investment incompetitiveness, including branding, reorganization and human investment, is lacking (Fig. 5-10).
Given that tax incentives in Japan have been biased towards physical investment and R&D investment, if
Japan is going to introduce tax incentives, it needs to consider the incentives that promote investment incompetitiveness. Since introducing corporate tax breaks rather than capital investment tax reductions will
neutralize investment incentives between knowledge-based capital and physical capital, from the standpointof economic efficiency, this may be preferable8.

Figure 5-10 Investment intensity in tangible and knowledge-based capital (2010)(% of value added)
30
Tangible capitalComputerised information
Innovative property
Economic competencies

25
20
15
10
5
0

d
n
a
l
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I

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g
r
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S

m
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B

Source: OECD (2013), “Supporting Investment in Knowledge Capital, Growth and Innovation”

8

The tax system to encourage investment in human resources introduced in the past was introduced as a provisional measure
and was abolished. The R&D tax scheme is still in operation.

30

40th Medium-Term Forecast:
2013-2025

What is to blame, School or Society?
Human capital in Japan and Survey results of OECD・PIAAC
As explained above, in Japan, the tertiary graduation ratio is high compared with other OECD countries.
However, even if the education is said to be the same, there is likely to be considerable difference in thecontent and quality. From a global perspective, how does the quality of Japan’s tertiary education actuallycompare?
PIAAC survey results corroborate high level of human capitalThe data that can answer this question is the OECD Programme for the International Assessment of
Adult Competencies (PIAAC) survey of adult skills published on October 8, 2013. The survey interviews
men and women aged 16 to 64 nationwide in all member countries, assessing their literacy, numeracy andproblem-solving in technology rich environments as well as the education and career history of participants.
The survey results are expected to be used to analyze the relationship between adult skills and educationand vocational training, and to develop policies for life-long learning and school education.
Looking at results by country (see Table below), Japan achieved the highest average scores among the 24participating countries in literacy and numeracy. On the other hand, in problem solving in technology richenvironments, Japan performed averagely.

Table: Proficiency of adults in key information-processing skills

NationLiteracy(Average)

Numeracy(Average)

Australia
FinlandFranceGermany
Italy
Japan
Korea
U.S.
England / North Ireland (UK)
Average (24 participating nations)

280
288
262
270
250
296
273
270
272
273

268
282
254
272
247
288
263
253
262
269

Problem solving in technologyrich environments(High score ratio, %)38
42
Nonparticipation
36
Nonparticipation
35
30
31
35
34

Source: OECD, “OECD Skills Outlook 2013”

Income and education
Thus, Japan’s human capital can be considered to be high quality both in terms of education and its
outcome. However, is this high quality human capital actually being used? If we look at the relationshipbetween per capita GDP (nominal in dollars, 2011) and education (ages 25-64), a positive correlation canbe confirmed. This finding is consistent with the theory that education is in a positive relationship withproductivity and matches the theoretical forecast of human capital (see Figure below). On the other hand,
Japan is under the approximation curve, which means that per capita GDP is lower than education predicts.
In other words, high quality human resources are not used as effectively as in other countries and are nottranslated into productivity.

31

40th Medium-Term Forecast:
2013-2025

Figure: The relationship between education and GDP per capita (2011)(GDP per capita, U.S. dollar)
80,00060,000U.S.
Germany
France40,000Australia
Finland
Korea

Italy

CanadaJapan

20,000

0
0
10
20
30
40
50
60
Source: OECD(2013), “Education at a Glance OECD indicator 2013” (% of population that has attained tertiary education)

Support for women’s active participation is a burning issue
Japan needs to realize that the reason productivity is low in the economy as a whole in spite of educationand educational outcomes is that there is something wrong not with the skills individuals possess but withthe economic society that uses them. One problem that can be clearly identified is the persistence of asituation where many women have skills that are comparable to those of men but are nonetheless notparticipating in the labor market. A JCER report published in February 2008 pointed out that the waste ofhuman capital that occurs in Japan is partly attributable to a lack of active participation by women9. In ourview, Japan needs to allow diverse working styles, promote active participation by women and men’s
involvement in housework and childcare to support this, and effectively use existing human capital stock. It
also needs to explore new Japanese-style ways of accumulating human capital.

9OECD also reports in this PIAAC survey results, many employees do not feel utilizing their skills at place of work inJapan.

32

40th Medium-Term Forecast:
2013-2025(4) Conclusion
To sum up, the strength of fundamentals on the supply side is likely to change as follows:

Although work force decline and aging are inevitable, the rate of workforce decline will be moderated
through improvement in the workforce participation rate of women and the elderly.



Private corporate capital stock will show an upward trend, as savings (= investment) increase inproportion to the decrease in the government sector deficit.



Public capital stock will be maintainable at the current level until around 2025, but may then prove too
costly to update properly and start to hamper growth.

Although productivity is low, the level of human capital stock is high and, assuming that systems also
improve to some degree, with the conclusion of the TPP and promotion of equal participation of men
and women, there is little risk of productivity growth slowing down.

33

40th Medium-Term Forecast:
2013-2025

6.

Economic and social effects of the Tokyo Olympics
In September 2013, Tokyo was named as the host of the 2020 Summer Olympics and Paralympics. What

impact will this have on the Japanese economy?
Key economic impacts include (i) an increase in private- and public-sector investment ahead of thegames, (ii) growth in consumer spending in Japan as a result of the games, and (iii) a boost to Japan’s
reputation and media exposure from the global attention given to the games. In addition to these economic
effects, the games will also have an impact on national welfare which will not necessarily be reflected
directly in GDP.
If we consider that an increase in a certain type of expenditure results in a reduction in another type of
expenditure (substitution), it is difficult to calculate the net impact of hosting the games. In this report, we
tried to calculate the amount of demand generated by the games, focusing as far as possible on expenditure
directly related to the hosting of the games, in principle. Investment in the development of the Tokyo
waterfront area (Ariake North District) - one of the focal points of the plans for the Olympics and also
where the athletes’ village will be built – is included in the financial impact and growth in tourists to Japanfollowing the boost to Japan’s worldwide reputation and recognition, and improvement of systems toaccommodate them are also taken into consideration as impacts of the games. On the other hand,infrastructure investment brought forward following Tokyo’s selection as the host city is not taken into
consideration. The Tokyo Metropolitan Government has previously formulated a long-term vision for thecity’s development in anticipation of the games and Tokyo’s selection as the host city is likely to give aboost to development in accordance with this strategy. According to our estimation, the games will have theeffect of generating total demand in the years through to 2025 of 2.1 trillion yen and the games are also
expected to have a social impact that will not necessarily be evident in GDP. The following section explains
this forecast in detail.
Investment in Olympic facilities will be limited and infrastructure will be developed in line withlong-term vision
In terms of investment, public investment plans including the construction and renovation of Olympic
facilities and the development of roads, railways and other infrastructure have been formulated andprivate-sector investment in bars and restaurants and accommodation facilities, etc. may also increase.
However, planned expenditure on facilities for the upcoming Tokyo Olympics is around 360 billion yen(according to Tokyo Metropolitan Government estimates), which is modest compared with Olympics heldin other countries in the past. One point to emphasize is that, if anything, Tokyo will make use of its
existing infrastructure and facilities to host the games.
The games may give a boost to investment in ports, highways, accommodation facilities and otherinfrastructure that could not be undertaken previously but since the games last for one summer only it
would be better to invest in the kind of facilities that will not be worthless after the games. Investment infacilities that will only be used for the games - though effective in pushing up demand temporarily – will
necessitate cuts in other areas to fund this (or tax hikes to finance public investment) and the net impact
may not be positive.

Seen in this light, the role of the games is perceived as giving a boost to rational

investment that should have been made anyway. At the time of the Tokyo 1964 Olympics, much of theinfrastructure was completed in a rush, but this time, given the government’s financial difficulties,
infrastructure development that considers the long-term maintenance and updating costs is required. In this34

40th Medium-Term Forecast:
2013-2025

respect, in 2001, the Tokyo Metropolitan Government formulated the Development Plan for Tokyo
Megalopolis and the City Planning Vision for Tokyo (revised in 2009), and the games in 2020 also meshwith this plan. The Tokyo Metropolitan Government’s investment plans include investment that is essential
for the hosting of the games such as road development (Fig. 6-1) but this is seen as investment that would
have been made as part of the city’s development to increase global competitiveness and enhance quality oflife even if the games had not been held in Tokyo and, in this report, we decided not to include this as an
economic effect of the games.

As for the demand-generating effect of the games, we assumed the net

boost to public investment demand to be only 280 billion yen which is the portion of the planned Gamesbudget that is likely to be included in public investment（construction of the athletes village which will befinanced by the private sector, etc. is not included in public investment）.
Similarly, it is difficult to judge the extent to which the games will push up private investment, but theinvestment (estimated at around 500 billion yen) in the planned development of the Tokyo Waterfront Area
(Ariake North District), which picked up pace with the Olympic bid plan, was included in the boost to
private investment. Athletes’ village construction expenses of around 100 billion yen are also included in
private investment. As explained above, there may also be additional private investment in accommodation
facilities and such like which is brought forward ahead of the games, but, given that Tokyo already has
sufficient capacity, the bringing-forward and subsequent decline of investment were not factored into theforecast.

Figure 6-1 Main investment project about infrastructure in Tokyo metropolitan area
Investment projectContents (time, scale)Complete 90% of the roads in 2020F.Y. (50% in 2011F.Y.)
Maintenance of the three loop roads
Remaining works are estimated to be over 1trillion yen.
A proposal for Metropolitan Express Company (Jan 2013) estimates
Repair work of Metropolitan Expressway 790-910billion yen is needed for replacement and maintenance.
Moreover, about 320billion yen will be needed 10years after.
Estimated construction costs are 400 billion yen (Covered by private
The direct train from Narita to Haneda fund) mentioned “Japan Revitalisation Strategy” in June 2013 to
make efforts to develop.
Moving Tsukiji central wholesale market Completion is scheduled in 2015F.Y. Construction costs are aboutto Toyosu
100billion yen.
Extension of YURIKAMOME line fromNot Progressing.
Toyosu to Kachidoki
Casino plan

Bipartisan caucus consider to submit legislation to promote casinos.

Residential development in thewaterfront area

The resident population at Ariake North District is expected to growfrom 7,000 to 38,000.
⇒Investment demand of about 500billion yen (estimates) for
resident and business and commercial facilities.

Note: Only the development in the waterfront area is included as an effect of the Olympics.
Sources: Tokyo Metropolitan Government; Ministry of Land, Infrastructure, Transport and Tourism; etc.

As for domestic consumption, the operating costs will be reflected in government consumption and will
push up GDP, and tourism demand and expenditure on sales of Olympic merchandise, etc. may increase.
The operating costs that will be reflected in government consumption are estimated, based on the Tokyo
Metropolitan Government’s plan, at around 270 billion yen. Around 70 billion yen of this will be recordedin the form of new demand as labor costs. Private consumption is likely to be pushed up around 440 billion
yen through games-related expenditure such as consumption by games spectators and merchandise,including tourism expenditure in the years running up to the games and throughout the year of the games.

3540th Medium-Term Forecast:
2013-2025

Increase in tourists to Japan will push demand up by around 700 billion yen in the years throughto 2025
Regarding the effect on Japan’s reputation, etc., which is more important in the medium and long-termand yet difficult to measure, possible impacts include growth in the number of tourists to Japan due toincreased global recognition, the hosting of international meetings and events in Japan, and an increase intrade and overseas investment.
Tourist income is one major economic effect that can be expected from hosting the games. In calculating
GDP, consumption by foreign tourists in Japan is recorded in Japan’s exports. During the games, in addition
to around 45,000 athletes, coaches, officials, etc. who participate in the games, almost 600,000 games
spectators are expected to visit Japan from overseas. Furthermore, the number of visitors to Japan may
increase - not only during the games but also in the medium and long term - due to increased global
recognition and the development of systems for receiving visitors to Japan. However, if we look at pastexamples, although there are cases where host cities dramatically improved their status as tourist
destinations such as Barcelona, the effect varies depending on the host. According to research assessing thenumber of tourists from overseas in past host countries10, unlike exports explained later, hosting the games
is said to have the effect of increasing the number of tourists in the short term, but the effect diminishes
over the long term. In this report, we tried calculating the boost to exports, assuming a maximum increaseof 3% in the number of tourists during the 7 years before and after the games (increase is partially offset bydecrease, as the games will also have the effect of deterring some people from visiting Japan in the year of
the games). On this basis, we estimate that in the 13 years to 2025, the games will increase the number offoreign visitors to Japan by almost 4 million in total and give a boost of around 660 billion yen to exports.
Some may think that Tokyo’s hosting of the games for the second time cannot be expected to have as big
an effect as a city hosting the games for the first time, but there is still certainly room for growth in thenumber of visitors to Japan. If we look at visitor numbers in 2012, Japan ranked 33rd with 8.36 million
visitors, trailing behind Malaysia (25.03 million visitors), Thailand (22.35 million visitors) and South
Korea (11.14 million visitors)11. The Government set itself the target of increasing the number of visitors toJapan to more than 30 million by 2030, and to do this, it needs to further increase visitors from East Asia,
which is a major market for Japan, and to also get people from a wide range of other regions to choose
Japan as a place to visit.
As for trade, there are research findings saying that, after the games, host nations see as much as a 30%
increase in their exports compared to other countries12. By hosting the games, nations send out a signal to
the world that they are liberalizing and deregulating trade and as a result this actually happens and theamount of trade increases. Incidentally, 1964, when Tokyo hosted the Olympics for the first time, was theyear when Japan joined the OECD, and China joined the WTO in 2001, the year Beijing was selected tohost the Olympics. In Japan’s case today, negotiations to conclude economic partnerships such as the TPP
and the Regional Comprehensive Economic Partnership for East Asia (RCEP) would seem to fit this pattern.
If a 30% increase in exports were achieved, the impact would be enormous, but in this report, we did notinclude this as an effect of the games.

10Song, Wonho (2010) “Impacts of Olympics on Exports and Tourism,” Journal of Economic Development, Vol.35, No.4
Japan National Tourism Organization (JNTO)
12
A. K. Rose & M. M. Spiegel (2011) “The Olympic Effect,” Economic Journal, Vol.121, Issue 553, pp.652-677
11

36

40th Medium-Term Forecast:
2013-2025

Figure 6-2 The effects on final demand of Tokyo Olympics(Bil. Yen)
2013
～2019
Private consumption
80
Private investment
600
Government consumption
35
Public investment
280
Exports
230
Total GDP
1,225
500
450
400
350
300
250
200
150
100
50
0

2020

2021
～2025

360
35
60
455

370
370

Total

Main factors

440 Olympic-related purchases, Domestic tourism
600 Waterfront development, Olympic village
70 Staging the games
280 Olympic facilities construction
660 Tourists revenue from abroad
2,050(Bil. yen)

Private Consumption
Private Investment
Public Investment
Government Consumption
Exports

2013
2014
2015
Note: Forecast by JCER

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025
(Year)To recap the foregoing, hosting the games is expected to have the effect of generating demand of around
2.1 trillion yen in total (Fig. 6-2). If we look at average GDP fluctuations in the years leading up to thegames and several years afterwards for the nations that hosted the Summer Olympics after the Tokyo 1964
Olympics, we see that, while figures vary widely from country to country and the results should be seen
with some margin of error, there is a tendency for growth to pick up from around four years before thegames through the year of the games and to subsequently drop off in the year following the games. A
breakdown by demand component reveals that gross fixed capital formation increases from around four
years before the games, private consumption is pushed up in the year of the games, and there are negative
repercussions after the end of the Olympics the following year. Likewise, the upcoming Tokyo Olympics
are expected to have a similar pattern of impacts, though their contribution to growth will be insignificant around 0.1% percentage points at most.
Ripple effect of demand using the Input-Output Table
The 2.1 trillion yen in demand generated by the games mentioned above is only the amount of final
demand created by games and does not include the ripple effect that this will have on the wider economy.
Therefore, we used the Input-Output Table published by the Ministry of Internal Affairs andCommunications to analyze which industries would benefit from the ripple effect of this new demand
generated by the games and to what extent. To study the economic ripple effect using the Input-Out Table,
it is first necessary to consider which industries will experience new demand. In the case of private
consumption, as explained above, new demand consists in domestic games spectators’ consumption andpurchases of merchandise including tourism expenditure. For consumption by games spectators, we
proportionally divided consumption taking into consideration consumption trends for overnight visitors andsame-day visitors using the “Consumption Trend Survey for Foreigners Visiting Japan” by the Japan

37

40th Medium-Term Forecast:
2013-2025

Tourism Agency. We allocated consumption growth that can be expected from sales of merchandise andcorporate sponsorship of the Olympics to private consumption depending on the advertising expenditure ofeach industry. Private and public investment including Olympic-related facilities and the waterfront
development was divided into residential construction and non-residential construction according tobuilding estimates. Government operating costs are mostly recorded as intermediate demand and not final
demand. Therefore, we took only the labor cost component of operating costs as costs that create new
demand and accumulated the rest as intermediate demand generated through the ripple effect of ticket sales
and other Olympics event consumption. Finally, we proportionally divided exports attributable toanticipated overseas tourist income among sectors based on exports (direct purchases) in the Input-Export
Table. Fig.. 6-3 shows a breakdown of the new demand outlined above by demand component for 15
industries.

Figure 6-3 Increase in final demand by industry
1000
900
800
700
600
500
400
300
200
100
0

(Bil. yen)
Olympic-related consumption, domestic tourism (Private consumption)
Buildings and infrastructure (Private and Public investment)
Operating costs (Government consumption)
Tourists from abroad (Export)

Others

Personal services

Other business services

Advertising/research/
information services

Public services

Transport

Real estate

Finance and insurance

Commerce

EnergyConstruction

Daily commodities

Processing and assembly

Material

Agriculture/forestry/・ Mining
fishery

Sources: Tokyo Metropolitan Government; Ministry of Internal Affairs and Communications, “1995, 2000, 2005 Link InputOutput Tables”

An overview of new demand by industry shows that demand for “Construction,” which includes
waterfront area development and Olympic facilities and infrastructure, will be biggest. “Personal services”
and “Transportation,” which include accommodation, travel expenses and ticket sales, will be pushed up by
private-sector consumption and exports.
After allocating new demand to each sector as explained above, we used the Input-Output Table toexamine which industries would benefit from the ripple effect of the new demand in each industry (Fig.
6-4).

38

40th Medium-Term Forecast:
2013-2025

Figure 6-4 The ripple effects by industry (increase of production)
500
450
400
350
300
250
200
150
100
50
0

(Bil. yen)
Olympic-related consumption, domestic tourism (Private consumption)
Buildings and infrastructure (Private and Public investment)
Operating costs (Government consumption)
Tourists from abroad (Export)

Others

Personal services

Other business services

Advertising/research/
information services

Public services

Transport

Real estate

Finance and insurance

Commerce

EnergyConstruction

Daily commodities

Processing and assembly

Material

Agriculture/forestry/・ Mining
fishery

Sources: Tokyo Metropolitan Government; Ministry of Internal Affairs and Communications, “1995, 2000, 2005 Link InputOutput Tables”

The sector where the biggest ripple effect (additional production growth) is seen is the “Materials” sector.
Increase in final demand for construction will bring about expansion in production. The new demand forconstruction will have a ripple effect not only on the “Materials” sector but also on “Business services.”
This is because this industry is made up of services such as civil engineering and construction services, andtemporary worker services. Consumption by tourists from overseas and domestic games spectators will also
push up “Business services.” In the “Commerce” sector, tourists from overseas bringing significant growthin new demand and the construction of Olympic related facilities will increase production. In the“Advertising” industry, demand will expand due to promotions and advertising by sponsors and expansionin advertising as a result of increased economic activity.
The total value of such ripple effects comes to around 1.8 trillion yen. When this is combined with new
demand of around 2.1 trillion yen, the hosting of the games will bring about production of around 3.9
trillion yen.
The impact on welfare that cannot be ignored
The impact of the games is not confined to economic effects that are directly reflected in GDP. The
hosting of a major event has a direct impact on people’s happiness and according to one study13 ,willingness to pay for the intangible benefits (non-monetary effects such as enjoyment and inspiring
children) of the United Kingdom’s hosting of the Olympics was £22 per household in London and £12 inother regions (for 10 years) and, for the United Kingdom as a whole, the value of the intangible benefits ofhosting the games was estimated at around £3.2 billion (around 500 billion yen). Also, according to thepost-games evaluation report of the London Olympics, the games had an impact in a wide range of areas
besides the economy, including the promotion of sport and participation in volunteer activities （Fig. 6-5）.

13

Economics for the Environment Consultancy(2005) “Olympic Games Impact Study - Stated Preference Analysis”

3940th Medium-Term Forecast:
2013-2025

Figure 6-5 The effect by London Olympic
1. The Games have provided a substantial boost to the UK economy
2. More of us are participating in sport because of the Games
3. The Games inspired a generation of children and young people
4. The Games were the catalyst for improved elite sporting performance in the UK
5. The Games Supported the growth of the UK tourism industry
6. The Games set new standards for sustainability
7. The Games improved attitudes to disability and provided new opportunities for disabled people
to participate in society
8. Communities across the UK engaged with Games
9. The Games have increased enthusiasm for volunteering
10. The Games accelerated the physical transformation of East London
11. Socio-economic change in East London has been shaped by the Games
12. The Games delivered many strategic benefits and lessons learnt
Source: UK Department for Culture Media & Sport (2013), “London 2012 Games Meta Evaluation: Report
5: Post-Games Evaluation”
The number of people who participate in volunteer activities in Japan is not high compared with otheradvanced nations (Fig. 6-6) but, under the Tokyo Metropolitan Government’s plan, around 80,000
volunteers will be required for the Tokyo Olympics, and this could make volunteer activities morewidespread. Generally speaking, people who are involved in volunteer activities are said to feel moresatisfied with life and such activities also have the role of maintaining social connection14. In the United
Kingdom, in 2012-2013 the volunteer population stopped declining and various initiatives such as the Join
In campaign to encourage people to participate as volunteers in sport and regional activities have continued
even after the London Olympics.
Growth in the sporting population is also an important effect in Japan, where the percentage of the
population taking insufficient exercise is rising. In the United Kingdom, the number of people taking
exercise at least once a week was 15.3 million in 2012, up 1.4 million from 200515. The promotion of sport
is said to contribute not only to the improvement of health but also to community formation and fulfillment
in life for elderly people (Fig. 6-7). Also, continuation of exercise reduces the risk of lifestyle diseases, etc.
and, by extension, will also help to reduce medical care expenses which are trending upward. According tosurvey results, a tendency for medical expenses to be 8% higher for people who take insufficient exercise
has been observed16. In view of the fact that general medical expenditure on lifestyle related diseases are as
much as 9 trillion yen a year, there is the potential to save several hundreds of billions of yen in medical
expenses a year simply by improving exercise habits. When measured solely in terms of directly generated
demand, the 2 or 3 trillion yen impact of the games mentioned above is not necessarily huge, but if Japan isable to use the Tokyo Olympics, as an opportunity to leave a positive long-term legacy, as was also stressedat the time of the London Olympics, then their impact will be much bigger.

14

OECD (2011) “How’s Life?: Measuring Well-being”
Sport England, Active People Survey
16
Kuriyama S, Hozawa A, Ohmori K, Suzuki Y, Nishino Y, Fujita K, Tsubono Y, Tsuji I (2004) “Joint impact of health risks
on health care charges: 7-year follow-up of National Health Insurance beneficiaries in Japan (the Ohsaki Study),” Preventive
Medicine, 39 (6).
1540

40th Medium-Term Forecast:
2013-2025

Figure 6-6 The proportion of active members of voluntary organizations (2005)40(%)
church or religious organization
sport or recreation
aret, music, educational
environmental organization
charitable/humanitarian organization

35
30
25
20
15
10
5
0
CanadaUK
Source: World Values Survey

U.S.

FranceGermany

Italy

Korea

Japan

Figure 6-7 Perceptions of lack of exercise (left ), the effect of sports promotion incommunities (right)
(%)
80
70
60
50
40
30
20
10
0

<Do you perceive yourself having
too little physical activity?>

0

10

20

(Multiple answers, %)
30
40
50

Community formation and vitalization

Yes
No

Providing motivations for elderly people
Exchange among family members
Building up physical strength of children
Effective utilizaion of leisure hours
Promoting intergenerational exchange

Jan 2013

Sep 2009

Aug 2006

Feb 2004

Oct 2000

Oct 1997

Oct 1994

Oct 1991

Healthy development of youth
Effective utilizaion of sports facilities
Improve people's health in the…
Nothing in particular

Source: Ministry of Education, Culture, Sports, Science and Technology

41

Jan-13
Sep-0940th Medium-Term Forecast:
2013-2025

7.

Energy and CO2
In the energy field, the progress of the shale revolution is a focus on attention. The shale revolution has

had a ripple effect not only on natural gas but also on crude oil and has also had an impact on total energy
supply and demand projections. Changes in crude oil price assumptions will also have a very big impact on
economic developments in Japan. It is necessary to prepare a number of scenarios and be ready for change.
When we carried out simulations based on the price scenarios published by the EIA (Fig. 7-1), we foundthat the average real growth rate for 2013-2025 will work out around 0.4% higher or lower due to theimpact of the crude oil price (Fig. 7-2).

Figure 7-1 The multiple assumptions about oil prices by U.S. EIA
250(dollars/barrel)
211.7

Oil price (actual)
EIA (Reference Scenario)
EIA (High price Scenario)
EIA (Low price Scenario)

200
150

EIA forecast

145.4
87.0

100
50
0

1990
1995
2000
2005
2010
Sources: The Nihon Keizai Shimbun; U.S. Energy Information Administration

2015

2020

2025
(Year)

Figure 7-2 The simulations based on the multiple assumptions about oil prices by EIA
650(Tril. yen)
Real GDP

600
550
500
450
2000
20

2005

2010

2015

(yoy, %)
2.0
Consumer Price Index(tax-excluded)
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
(F.Y.)
-2.0
2005
2010
2015
2020
2025 2000(Vs. 1990, %)2CO2 emissions

2020

2025

(per Nominal, %)0

15(F.Y.)

Primary balance

-2

10

-4
-6

5

-8

0
2000

(F.Y.)
2005-102025 2000

2010
2015
2020
Main Scenario
EIA High price Scenario
Source: U.S. Energy Information Administrarion, forecast by JCER

42

(F.Y.)
2005
2010
2015
EIA Reference Scenario
EIA Low price Scenario

2020

2025

40th Medium-Term Forecast:
2013-2025

In Japan, there was also a major change in terms of energy demand after the Great East Japan Earthquake.
The industrial sector made good progress in becoming more energy efficient in the 1970s but progressslowed in recent years. However, the most recent electric power statistics show that, from FY2010 throughFY2012, both the industry and household sectors made significant progress in increasing power efficiency(Fig. 7-3). Furthermore, power consumption in the industry and household sectors is expected to continue
being reduced during the forecast period at such a rate that 20% energy savings will be achieved by 2030,
compared to 2010, thanks to the widespread use of energy efficient technologies in addition to firmly
established power saving efforts.

Figure 7-3 Efficiency of energy usage
8
6
4
2
0
-2
-4
-6
-8
-10

<Industrial Sector>(Vs. 2010, %)Electricity demand (from the industries)
Indices of Industrial Production

2011:2
11:3
11:4
12:1
12:2
12:3
12:4
13:1
13:2
13:3
13:4
(Quarterly)
Note: Percentage change compared to the same period in 2010.
Sources: Agency for Natural Resources and Energy“Electric power statistics”, Ministry of Economy, Trade and Industry“Indices of Industrial Production”

2(Vs. 2010, %)<Household>0-2Electricity demand

-4
-6
-8
-10
-12
-14
2011:2
11:3
11:4
12:1
12:2
12:3
12:4
Note: Percentage change compared to the same period in 2010.
Source: Agency for Natural Resources and Energy“Electric power statistics”

13:1

13:2

13:3

13:4
(Quarterly)

To break down the energy barriers stopping Japan from securing sufficient energy, Japan needs to pursue
measures on the supply side in addition to efforts on the demand side, including reviewing the positioningof nuclear power generation and seeking to reduce costs through general energy policy measures. Securing
LNG imports is another major issue.
Although the percentage of renewable energy is still low, accounting for 4.7% of the domestic energy
supply in FY2012, it is rapidly becoming more widely used (Fig. 7-4). This trend is being supported by
feed-in tariffs which are among the highest in the world. The system is designed to allow renewable energy
suppliers to fix a price by submitting just a plan and to wait for costs to fall and has the disadvantage that43

40th Medium-Term Forecast:
2013-2025

actual work is limited at the present time. Since the cost of purchasing at a fixed price reverberates toelectricity charges, the system needs improving urgently.
Energy supply and demand strategies are also closely connected with global warming countermeasures.
CO2 emissions are expected to start decreasing from 2014, reflecting the power-saving initiatives
mentioned above (Fig. 7-5).

Figure 7-4 Contribution of renewable energy (except hydroelectric power) to total electricity
generated
25

(%)
22.8%
20.3%

20

17.3%

15

5

10.5%

10.1%

10

7.4%
4.7%

6.0%

5.0%
3.7%

2.6%

2.5%

4.9%
2.4%

1.1%

0.3%

0
20052012
20052012
20052012
20052012
20052012
20052012
20052012
Italy
Spain
Germany
UK
FranceU.S.
Japan
Note: Solar power, wind power, geothermal power, tidal power, biomass, etc are included
Sources: IEA, “Energy Balances of OECD Countries”, “Energy Balances of Non-OECD Countries”

20052011
China(Year)

Figure 7-5 CO2 emissions
25(Vs.1990, %)Forecast

20
15
10
5
0
1990
1995
2000
2005
2010
2015
Source: The Institute of Energy Economics, Japan, “EDMC Energy Data Bank”

44

2020

2025
(F.Y.)

40th Medium-Term Forecast:
2013-2025

8.

Policy Proposals
If further tax increases are made, the government deficit will start to be cleared and the debt-to-GDP

ratio will start to stabilize (Fig. 8-1). The government has embarked on steps to avoid fiscal default, which
would be enormously damaging, and it is important that it does not stop taking these steps.

Figure 8-1 The consumption tax rate and government debt to GDP ratio
250(% of Nominal GDP )(%)

Public debt of central and local government

225

18

Forecast

Consumption tax rate (Right scale)

20

200

16

175

14

150

12

125

10

100

8

75

6

50

4

25

2

0

0

1980
1985
1990
1995
2000
2005
2010
Sources: Ministry of Finance; Cabinet Office, “System of National Accounts”

2015

2020

2025
(F.Y.)The summary table (p.5) gives an overview of the forecast and the Japanese economy is likely to achieve
growth of around 0.9% in the 2010s and around 0.7% in the early 2020s. Inflation is likely to start risingsteadily in the late 2010s largely due to the consumption tax hikes. However, the household savings rate
will inevitably turn negative chiefly as a result of aging.
Under the main scenario based on current trends, in the years leading up to 2025, growth will be limited,reflecting Japan’s aging labor force and aging capital stock, and this will make the road to fiscal
reconstruction far from smooth.
However, judging from the level of human and physical capital stock alone, Japan’s economic
fundamentals are sufficiently strong. The problem is that hidden skills are not being fully utilized. For
many reasons including responding to changes in the overseas environment, Japan needs to stage a robust
recovery. More specifically, it is essential to take steps to strengthen the economy including:

Fiscal reconstruction through further consumption tax hikes;

Reduction of the strain of increased tax payments on households through wage increases;Use of human capital stock through greater support for female labor force participation;Efficient selection of public capital stock and development of better ways to maintain and manageit;Market access and improvement of the export environment through the conclusion of the TPP; andMore efficient use of energy through the promotion of power saving and clarification of thepositioning of nuclear power generation.

Those measures need to be done as soon as possible in order to see when Tokyo hosts the Olympics in 2020,the various efforts are beginning to bear fruit.

45

40th Medium-Term Forecast:
2013-2025

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