Population Aging and Declined Effects ofFiscal and Monetary Policies:
Japan’s experience and Lessons to Korea and China

Naoyuki Yoshino (Keio University, Japan)
yoshino@econ.keio.ac.jp

andHiroaki Miyamoto (Tokyo Metropolitan University)
January 17, 2022

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Working population is diminishing and elderly population is
growing rapidly…

3Outlines
A new Keynesian DSGE model with heterogenous households isdeveloped (Yoshino and Miyamoto, 2017)
Japan and the World Economy• Empirical approach: dynamic fiscal multiplier (Miyamoto and Yoshino, 2020)
Macroeconomic Dynamics• Population aging reduces aggregate output, consumption, andinvestment by reducing total labor supply in the long-run• Population aging weakens the effectiveness of fiscal andmonetary policies to boost an economy• Increase of Fiscal Deficits and Fiscal Sustainability Conditionr<g, interest rate < economic growth rate
Stable bond market (demand and supply of bond)4

Long-run effects of population Aging:
Decline in Labor Participation rate
GDPConsumption

WelfarePopulation Aging (workers↓)→Output ↓ , Consumption ↓ Labor Supply ↓, Investment ↓5

Impact of Monetary policy declines as agingConsumption• Population aging reduces the effectiveness of a monetary policy
shock on aggregate consumptionDeclined Effectiveness of Monetary Policy
Monetary Policy (Working Population)→ Increase investment→ Wages of working population will rise
→ Consumption of working population will rise
(Retired Population)→ relies on pensions and social welfare→ monetary policy does not affect to retirees
7𝒌𝒌𝒌𝒌𝒚𝒊,𝒕+𝒌 − 𝒚𝒊,𝒕 = 𝜶𝒊 + 𝜸𝒕 + 𝜷 (𝒇𝒊𝒔𝒄𝒂𝒍 𝒔𝒉𝒐𝒄𝒌𝒊,𝒕 ) + 𝜺𝒊,𝒕8

Results; Fiscal Multiplier3

Non-aging economy

Aging economy
22.5

1.5

21
1.5
0.5
10-1

0.5

-0.5
0-101234-1-0.5

01234

Declined Effects of Fiscal Policy
Fiscal Policy (Working Population)→ Create new jobs
→ Unemployment rate declines→ Consumption of working population will rise
Retired population→ Not affected by fiscal policy→ consumption remains the same
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Recommended Policy->Productivity based wage rate->Postpone retirement age--------->Higher consumption & GDP,lower tax(1)Progress of Digital Technology→ work from home(2) Robot will assist elderly workers(a) Female Participation , Easier(b) Seniority wage system must be changed(c) Skill training (OJT training), On-line Training(d) Mobility of jobs, On-line Job interviews
USA~Age discrimination should be avoided

Source: Yoshino and Miyamoto (2016).

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Aging Population, COVID-19 and huge budget
deficits: Revisit of Fiscal Sustainability Condition
Aging: Increase in Social welfare spending
Lower fertility ratio
Aging: Lower Tax Revenues
Aging; further increase of budget deficits

Domar Condition to check fiscal sustainability

r＜△YY=η

Stabletime

Debt
explosion△Yr＞

Y=ηtime(2012)14

Greece: Interest rate

Japan’s Interest rate15

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Yoshino-Mizoguchi-Hesary (2019)

Supply of Government Bond
Demand for Government Bond𝜹∆𝑩𝒕𝟏𝑩∗=𝒓𝒕 < 𝟎
𝑩𝒕−𝟏
𝜹𝑩𝒕−𝟏
𝟏−
𝒃𝟏 + 𝒇𝟏

𝟏𝟔

𝑺𝒕𝒂𝒃𝒊𝒍𝒊𝒕𝒚 𝑪𝒐𝒏𝒅𝒊𝒕𝒊𝒐𝒏

Accumulated Government bond (Bt-1)< Interest elasticity of Demand (b1+f1)

Comparison between Greece and Japan

Accumulated Government bond (Bt-1)> Interest elasticity of Demand (b1+f1)

Global Solutions Journal (2020)

Accumulated Government bond (Bt-1)< Interest elasticity of Demand (b1+f1)

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Stability Condition for Local Government
δrL* = -(-G+TRN+NTR+TL+b0-b1rI+b2σI） =-rL*> 0
δBt-1(Bt-1ℒ－b1)2(Bt-1L－b1) <If Bt-1L－b1 <0 → Unstable
If Bt-1L－b1 >0 → Stable

δΔBL＊ ＝rL* x (-b1) > 0
δBt-1L(Bt-1L－b1) <(Bt-1L－b1) <0 Diverge(Bt-1L－b1) >0 Converge

Demand Sensitivity < Stock of Bonds → Stable(Demand side is willing to pay high interest rate)21

China-ROK-Japan-Cooperation(1)Long term Students’ Exchange(2)Business Exchange(3)Academics(4)Government Cooperation

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