Provisional Translation

Contents
Main text ――――――――――――――――――――――――――――――― 1
1. Introduction
2. Medium to long term economic projection(1) Potential growth rate(2) Economic growth rate and wage growth rate(3) Consumer prices and long-term interest rates
3. Medium to long term fiscal projection(1) Primary balance and fiscal balance of central and local governments combined(2) Outstanding debt of central and local governments combined
4. Risk and uncertainty
Results of Projection (Table) ――――――――――――――――――――――― 27
1. Economic Growth Achieved Case
2. Baseline Case
Appendix ―――――――――――――――――――――――――――――― 30
1. Detailed assumptions
2. Comparison with the previous projection (January 2023)
3. Comparison with private sector forecasts
4. References

1.Introduction
This projection is submitted to the Council on Economic and Fiscal Policy as basic
information for evaluating the progress of economic revitalization and fiscal consolidation, andfor considering medium- to long-term economic and fiscal policies.
This projection reflects the data and policies available at the time of the projection and isestimated using the "Economic and Fiscal Model," which presents the macroeconomy, publicfinance, and social security in an integrated manner. 1 In this July projection, based on the Basic
Policy for Economic and Fiscal Management and Reform 2023 2 and discussions at the Council
on Economic and Fiscal Policy, etc., we expanded the content by newly showing a breakdownof the potential growth rate by contribution, indicators on the distributional side, etc., as well as
by adding detailed explanations of each scenario and indicator, risk and uncertainty analysis,and "reference case" analysis.

2. Medium to long term economic projection
This projection reflects various economic statistics and incorporates the Cabinet Office's Midyear Economic Projection 3 up to FY2024. For FY2025 and beyond, we present the "Baseline
Case," which assumes that the TFP (Total Factor Productivity) growth rate will remain at thesame level as the average of the most recent business cycle, and the "Economic Growth
Achieved Case," which assumes that the TFP growth rate will increase to the average of theperiod before the deflationary situation. 4 The key assumptions for each scenario 5 are as follows.

Considerable leeway should be given when interpreting the projections due to various uncertainties involved.
Basic Policies for Economic and Fiscal Management and Reform 2023 (Cabinet Decision on June 16, 2023)
Chapter 4: Medium- to Long-term Economic and Fiscal Management
1. Sustainable economic and fiscal management from a medium- to long-term perspective(Enhancement of medium- and long-term economic and fiscal projection and its evaluation and analysis)
In considering the medium-term economic and fiscal framework, the analysis of the medium- and longterm economic and fiscal projection, including the positioning of economic scenarios and how policy effects
will manifest themselves, should be expanded.(*) In addition, the information to be disseminated externally,such as risk assessment and sensitivity analysis, taking future uncertainty into account, should be expanded.
(*) For example, explanation of the scenario where the effects of the government's measures are realized andthe policy approach necessary to achieve them, compared to the scenario where the economy is projected
to continue to grow at the current potential growth rate in the future.
3
Mid-year Economic Projection for FY2023 (submitted to the Council on Economic and Fiscal Policy on July 20,2023).
4
Per footnote 2, this report is explained in the order of the Baseline case and the Economic Growth Achieved Case.
5
See Appendix 1 for detailed assumptions.
121

Key assumptions for each scenario
Labor Force Participation Rate6(62.6% in FY2022)
Rising to some extent, especiallyaround 0.5%, an average of the mostamong women and the elderly
recent business cycle 7(63.8% in FY2032)
reaching around 1.4%, an average Higher than baseline case, especiallyfor the period before the economy among women and the elderly
entered the deflationary situation8(65.0% in FY2032)
TFP Growth Rate
(0.5% in FY2022)

Baseline
Economic
GrowthAchieved(1) Potential growth rate
Japan's potential growth rate was 4.2% in the 1980s and 1.6% in the 1990s, and has remained
below 1% since the beginning of the 2000s. As the working-age population continues to decline
at an accelerating pace due to the declining birthrate and aging population, economic growth isexpected to decline in the absence of changes in the economic structure and higher productivity
growth than before.
Figure 1. Five-YearAverage of the Population Growth Rate(%)
0.5

Total Population
0.1

0.0

0.0

-0.2
-0.5

-0.5
-0.6

-1.0

-0.1

-0.5

-0.6

-0.5

-0.5

-0.6

Working Age Population (15-64)
-1.0

-1.1
-1.5

-0.6

2001-2005

2006-20102011-20152016-20202021-2025

2026-2030

2031-2035（Yearly Average）(Notes) Computed based on Ministry of Internal Affairs and Communication (MIC),Population Census and MIC,
Population Estimates up to 2022, and on National Institute of Population and Social Security Research,
Population Projections for Japan: 2021-2070 from 2023.

In the Baseline Case, where TFP increases at the same rate as in the recent business cycle(around 0.5%), the contribution of capital input to the potential growth rate, which is calculated
See "Labor Force Demand and Supply Estimates," Employment Policy Institute, 2008. The baseline case is basedon "a case in which economic growth and labor participation advance to some extent" and the growth realizationcase is based on "a case in which economic growth and labor participation advance."
7
16th cycle (October-December 2012 to April-June 2020).
8
Average from the past to the 12th cycle (April-June 1980 to January-March 1999). In the previous projection(January 2023), the TFP growth rate was set to reach about 1.4% in 5 years from the beginning of the estimation
period, based on the estimate that TFP increased by about 0.9% pt in the 5 years from FY1982 to FY1987.
62

endogenously, will be slightly positive, but the negative contribution of labor input will increase
due to the decline in the working-age population, although labor participation is assumed toincrease to some extent. Overall, the potential growth rate is projected to remain in the mid-0%
range over the medium to long term, which suggests a continuation of Japan's recent trends.
In contrast, the Economic Growth Achieved Case assumes that the TFP growth rate will reacharound 1.4% by FY2027, which is the average of the period before entering the deflation
situation, through stimulating innovation and improving production efficiency by promoting
investment in the priority areas based on the New Form of Capitalism under public-private
partnership (investment in human capital, investment in GX/DX, etc., investment in start-ups,
investment in science, technology and innovation). Under this assumption, the higher rate of
TFP growth and the improved earnings environment for firms promote capital investment,
resulting in a higher contribution of endogenously calculated capital input. This result is also
consistent with the expectation of an increase in private capital formation due to the promotionof various types of investment mentioned above. With regard to labor input, it is assumed thatlabor demand will increase with economic growth, and that labor participation, especiallyamong women and the elderly, will be higher than in the baseline case due to the promotion ofdiverse work styles and other factors. Nevertheless, this assumption still cannot offset the impact
of population decline, and the contribution of labor input will be slightly negative. 9 All in all,the potential growth rate is projected to be around 2% in the medium to long term.

9

The number of the so-called working-age population (15-64 years old) is expected to decline at an annual rate ofabout -0.6% in the late 2020s, as shown in Figure 1. The population aged 15-69, which is the conventional
working-age population plus those in their late 60s, is expected to decline at an annual rate of about -0.5% overthe same period, which is slower than the decline in the working-age population. In the Economic Growth
Achieved case, the labor participation of women and the elderly is assumed to increase, and in particular, the labor
participation rate of the population in their late 60s is assumed to rise from around 53% in FY2022 to around 62%
in FY2032. This means that, in addition to the traditional working-age population, the population in their late 60s
and beyond is also expected to contribute to the labor force supply.

3

Figure 2. Decomposition of Potential Growth Rate(%)
54

contribution of TFP
contribution of labor

contribution of capitalpotential growth rate

4.2
0.5

3
2
1

1.9

1.8

1.0
1.0

1981-1990

1.8

1.2

0.6

0
-1

1.6
0.1
0.8

-0.3

-0.4

1991-2000

2001-2010

0.7

0.4 0.2
0.9
-0.1
-0.1

2011-2015

0.3
-0.1

0.8

0.5
0.2

0.3

0.6

1.0

-0.1

-0.1

0.5 0.2

1.4

0.5
-0.2

-0.1

2016-2022 Baseline case Economic Baseline case Economic
GrowthGrowthAchieved
Achievedcase
case
2023-2027

2028-2032(fiscal yearly average)(2) Economic growth rate and wage growth rate
The real GDP growth rate averaged around 0.9% in FY2013 - 2019, before the COVID-19
pandemic. Subsequently, the economy was strongly affected by the suppression and easing of
economic activity due to the pandemic, with significant negative growth (-4.1%) in FY2020 andpositive growth (2.6%) in FY2021.
As for the short-term outlook, according to the Cabinet Office's Mid-year Economic
Projection, although the economy is expected to be depressed by a slowdown in exports andother factors, a recovery in private consumption, including service consumption, and an increasein corporate capital investment are anticipated, leading to the growth of about 1.3% in real terms(about 4.4% in nominal terms) in FY2023. The moderate growth driven by private demand of
about 1.2% in real terms (about 2.5% in nominal terms) is expected in FY2024.
Thereafter, supply and demand of the overall economy will adjust, and the real GDP growthrate will converge to the potential growth rate. In the Baseline Case, the real GDP growth rate
will remain in the mid-0% range over the medium to long term. In the Economic Growth
Achieved Case, as the potential growth rate is higher than in the Baseline Case, the real GDP
growth rate is projected to be around 2% in the medium to long term. Similarly, nominal GDP
growth will be in the mid-0% range in the medium to long term in the Baseline Case, and it will
be around 3% in the medium to long term in the Economic Growth Achieved Case.

4

Figure 3. Growth Rate of Real GDP(%)
5
Economic Growth Achieved Case

4
3
2

1.3

1.7

0.8

0.4

1
0
-1
-2

Baseline Case

-3
-4
-5

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

Figure 4. Growth Rate of Nominal GDP(%)

5

Economic Growth Achieved Case

4

3.2

2.5

3
2
1

0.5

1.4

0
-1

Baseline Case

-2
-3
-4
-5

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

It is also important to look at per capita real GDP growth from the perspective of people's
standard of living and productivity, given the prospect that population decline will be intensified
in the future. The real GDP per capita growth rate will be higher than the real GDP growth rate
due to the impact of population decline and is projected to be around 1% in the Baseline Caseand more than 2% in the Economic Growth Achieved Case.

5Figure 5. Growth Rate of Per Capita Real GDP(%)
5

Economic Growth Achieved Case

4
3

2.3

1.7

2
1

1.3

0

1.0

Baseline Case

-1
-2
-3
-4
-5

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

Next, we look at the rate of wage growth to check the distributional aspect, such as whether
wage growth has been achieved in line with economic growth.
Figure 6. Growth Rate of Nominal Wage(%)

5

Economic Growth Achieved Case

4

2.6

3

3.2

2
1

1.6

0.8

0
-1

Baseline Case

-2
-3
-4
-5

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

The wage growth rate10 averaged around 0.5% over the nine years in FY2013 - 2021, pushed
down due to the increase in the ratio of non-regular employees amid the improvement in thelabor participation of women and the elderly, 11 but also raised up by boosting factors such as
the tightening of labor supply and demand in recent years. In FY2023, the wage growth rate is
expected to be around 2.6% as the spring wage negotiation (“Shunto”) resulted in the highest

10
11

Wage growth per employee (nominal).
See Cabinet Office (2022), Chapter 2, Section 1.

6

level of wage revision in around 30 years. In FY2024, the rate is expected to be around 2.5%.
Subsequently, in the Baseline Case, as the TFP growth rate does not increase, and the rates ofincrease in labor productivity and prices remain modest, the wage growth rate in the mediumto long-term stays around 1%. In the Economic Growth Achieved Case, the wage growth ratein the medium- to long-term is projected to be around 3%, as capital formation is more advanced
than in the Baseline Case, labor productivity increases, and prices rise in line with increased
demand, etc., under a relatively high economic growth rate.
With regard to real wage growth, which is calculated by subtracting the consumer priceinflation rate (discussed below) from the wage growth rate, it is about 0% over the medium tolong term in the Baseline Case, and about 1% in the Economic Growth Achieved Case as thewage growth rate is much higher than the CPI inflation rate.

(3) Consumer prices, long-term interest rates
Since the end of 2013, amid a non-deflationary situation, the CPI growth rate averaged about
0.8%12 in FY2013-2019. In FY2020 and FY2021, when COVID-19 spread, the rates were 0.2%
and 0.1%, respectively, amid sluggish demand due to the cumulative declaration of states of
emergency, etc. In FY2022, the rate was 3.2% due to price increases, mainly in energy and foodproducts, and is expected to be around 2.6% in FY2023 and 1.9% in FY2024.
In the Baseline Case, the CPI growth rate is projected to remain in the mid-0% range in themedium to long term. The nominal long-term interest rate is projected to rise to around 1% in
the medium to long term.
In the Economic Growth Achieved Case, the CPI growth rate is projected to move at about
2% over the medium to long term as the potential growth rate increases. Since the CPI growthrate is projected to reach a stable 2% in FY2026, the nominal long-term interest rate is assumed
to remain at the current level through FY2025 and then is projected to rise to around 3% in themedium to long term in line with economic growth.

The series of Consumer Price Index excluding the impact of the consumption tax rate hike is about 0.5% (theMinistry of Internal Affairs and Communication).
127Figure 7. Growth Rate of CPI
(%)

4
3

Economic Growth Achieved Case

2

1.8

1

2.0

1.2
0.7

0
-1

Baseline Case2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

Figure 8. Nominal Long -term Interest Rate
(%)
4
3.2
3
Economic Growth Achieved Case
2
1

0.9

0.6
0.5

0

Baseline Case-1

2012 13

14

15

16

17

18

19

20

21

22

8

23

24

25

26

27

28

29

30

31

32
(FY)

3. Medium to long term fiscal projection
On the fiscal side, reflecting the FY2023 budget, etc. the fiscal projections that are consistent
with two economic scenarios presented in the previous section are shown. 13 With regard to
expenditures, the defense capacity buildup, national resilience measures, etc., whose specificsizes are already decided in the multi-year plans, are reflected in the projection. Social security
expenditures are assumed to increase, reflecting factors such as the population aging and therate of price and wage increases, while other general expenditures are assumed to increase at therate of price increases. As for revenues, tax revenues and other revenues are assumed to increasein line with the macroeconomic variables. 14 The fiscal resources for strengthening defense
capabilities are assumed to be secured in line with the "Defense Buildup Plan" until FY2027,
and after that, necessary measures are assumed to be taken in the same manner as in FY2027.
(1) Primary balance and fiscal balance for central and local governments combined
The ratio of primary balance (PB) 15 to GDP for central and local governments steadily
improved since FY2013 until the spread of COVID-19 (around -1.9% in FY2018), 16 becauseof the promotion of expenditure reforms in the initial budget, nominal GDP expansion, increased
revenue due to consumption tax rate hike, etc., regardless of the population aging and theincrease in expenditure due to supplementary budgets, etc. Subsequently, due to the increase in
expenditures associated with the spread of COVID-19, the PB was around -9.1% in FY2020 and-5.5% in FY2021. In FY2022 and FY2023, although an increase in revenue is expected, theincrease in expenditures (that mostly contribute to supporting the economy) based on the
successive economic measures, including measures against the infectious disease, oil price andprice hikes, etc., is projected to result in a deterioration of PB (around -5.0% in FY2022 and 4.7% FY2023). In FY2024, since it is assumed that most expenditures for these economic
measures will be executed by FY2023, the PB is projected to be around -0.8%, recovering to
the level before the deterioration of the PB due to the increase in expenditures.
Then, in the baseline case, the PB is projected to be around -0.4% in FY2025, improving tonear zero in FY2026 and FY2027, followed by a gradual deterioration. 17 This is because theincrease in revenue, which grows at the same rate as nominal GDP growth, is projected to be
See Appendix 1 for detailed assumptions.
The underlying tax revenue trend based on the Provisional FY2022 Settlement and current economic trends istaken into account.
15
The primary balance (PB) is an indicator of how much of the cost of providing various administrative services,
including social security and public works (policy expenses), is covered by tax revenues and other sources. Thissection discusses trends in PB, excluding expenditures and fiscal resources for the recovery and reconstruction
measures and GX measures.
16
See Cabinet Office (2022), Chapter 1, Section 3, for information on past financial conditions, including theperiod of the COVID-19 pandemic.
17‘Defense Buildup Plan’ and ‘The Five-Year Acceleration Plan for Disaster Prevention, Disaster Mitigation, andBuilding National Resilience’ are included in this projection. The additional budget and finance scheme addressedin ‘Children's Future Strategic Policy’ are not included in this projection, since their concrete items and sizes will
be decided later. These assumptions also apply to the Economic Growth Achieved Case.
13
14

9

less than the increase in expenditures, which grows due to the population aging, prices andwages, and other factors.18 The ratio of fiscal balance to GDP for central and local governments
gradually increases due to interest expenses in response to rising interest rates, at a faster
deterioration pace compared to the PB during the projection period.
In the Economic Growth Achieved Case, the PB-to-GDP ratio for central and local
governments combined is around -0.2% in FY2025, with a surplus in FY2026, followed by a
growing surplus during the projection period. 19 This is because the increase in revenue, which
grows at the same rate as nominal GDP growth, is projected to exceed the increase in
expenditures, which grows due to the population aging, price and wage factors, and otherfactors. 20 In addition, the fiscal balance-to-GDP ratio for central and local governments
combined, while the PB is projected to remain in surplus after FY2026, is projected to remain
near zero during the projection period since interest expenses are projected to expand in response
to rising interest rates.

Figure 9. Primary Balance of Central and Local Governments Combined (Ratio to Nominal GDP)(%)

4

Economic Growth Achieved Case 1.7-0.2 0.4

2
0

-0.4

-2

-0.4
Baseline Case

-4
-6
-8
-10
-12

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

See BOX 1.
The effect on improvement in the primary balance by efforts for spending efficiency is assumed to be around
1.3 trillion yen per year in the Economic Growth Achieved Case when the impact on the economy is taken into
consideration, based on the materials submitted to the Council on Economic and Fiscal Policy by the members
from the private sector (May 28, 2018) and those by the Cabinet Office (July 21, 2021). Calculating mechanically
based on this assumption, if the efforts for spending efficiency carried out thus far are continued, the primary
surplus will be achieved in FY2025, around a year earlier, in the same case.
20
See BOX 1.
18
19

10

Figure 10. Fiscal Balance of Central and Local Governments Combined (Ratio toNominal GDP )(%)

4

Economic Growth Achieved Case

2
0
-2

-0.8

-0.0

-1.0

-1.3
Baseline Case

-4
-6
-8
-10
-12

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

(2) Outstanding debt of central and local governments
The ratio of outstanding debt of central and local governments combined to GDP has beenon an upward trend in the 2000s against the backdrop of the PB deficits and sluggish nominal
GDP growth, and rose sharply during the Great Recession. After FY2013, the pace of increase
slowed with the improvement of the PB and the increase in nominal GDP. However, due to theimpact of the COVID-19 pandemic and the supplementary budget to deal with it, it rosesignificantly again, reaching around 213.5% in FY2022. For the time being, due to the expansionof nominal GDP and other factors, it is projected to turn downward to around 210.6% in FY2023
and 206.9% in FY2024.
Then, in the Baseline Case, in the latter half of the projection period the ratio turns to go up,
as the outstanding debt, the numerator, increases due to the effect of the deterioration of the PB
and fiscal balance, while the nominal GDP, the denominator, grows only modestly.
In the Economic Growth Achieved Case, the increase in the outstanding debt, the numerator,
is projected to decline steadily over the projection period as a result of the improvement in the
PB and fiscal balances, while the nominal GDP, the denominator, is projected to expand.
Eventually the ratio steadily tends downward in the projection period.
It should be noted that as long-term interest rates rise, existing bonds issued at lower interest
rates will be refinanced at higher rates.

11

Figure 11. Outstanding Debt of Central and Local Govenrments Combined (Ratio to Nominal GDP)
(%)
230
220

Baseline Case
205.3

210
200

206.6

203.0

190
180

170.7

Economic Growth Achieved Case

170
160
150

2012 13

14

15

16

17

18

19

20

21

12

22

23

24

25

26

27

28

29

30

31

32
(FY)

<BOX 1> The PB movements by revenue and expenditure
Since PB is the difference between primary revenue and primary expenditure, PB worsens
if the revenue growth is less than the expenditure growth, and improves if the revenue growthis greater than the expenditure growth. The two economic scenarios in this projection show
the former in the Baseline Case and the latter in the Economic Growth Achieved Case.

Primary Revenue and Expenditure (Central and local governments, Percent of GDP)
Baseline Case(%)
35
Primary Expenditure

31.4

30

25

24.1

20

23.8 23.5

23.8

23.4 23.4 23.4

23.4

21.2

Primary Revenue

18.7

15

24.2

23.9

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

Economic Growth Achieved Case(%)
35

Primary Expenditure30

23.7 23.4

25

23.2

23.5 23.1

20

21.5

Primary Revenue
15

2012 13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

(Notes) 1.The classification is based on Government Finance Statistics manual 2014.
2.The primary revenue is “revenue” minus “interest income”.
3.The primary expenditure is “expenditure” minus “interest payment”.
4.Excluding revenue and expenditure for recovery and reconstruction measures and GX measures.
5.These primary revenue and expenditure remove transfers between central and local governments.

13This differences between the Baseline Case and the Economic Growth Achieved Case arecaused by the difference between the mechanisms that determine revenue growth and thosethat determine expenditure growth, as described below.


As for the revenue growth, it is generally defined by trends in tax revenues, which
account for the bulk of revenue. Since tax revenues are linked to macroeconomic
variables, such as household income, consumption, and corporate earnings, theygenerally have a strong correlation with nominal GDP. In this estimation as well, thegrowth of overall tax revenues is consequently linked to the growth of nominal GDP. (*1)
For this reason, the ratio of the primary revenue to GDP does not differ in the two cases.

As for the expenditure growth, social security expenditures fluctuate to reflect aging
factors and the rate of price and wage increases, while other general expendituresfluctuate in line with the rate of price increases. Since there is no difference in the aging
factor between the two cases, the difference in expenditure growth is mainly caused by
the difference in the rate of price increases. (*2) When looking at this as a percentage ofGDP, the difference between the rate of price inflation and the nominal GDP growth rate
becomes important. In the Baseline Case, since the inflation rate and nominal GDP
growth rate are similar over the medium to long term, the primary expenditure to GDP
ratio does not change so much, while in the Economic Growth Achieved Case, since theinflation rate is lower than the nominal GDP growth rate, the primary expenditure to GDP
ratio declines slowly.

(*1) Calculating the tax revenue elasticity looking at the relationship between the two, it is about 1 in the medium to longterm under both of the two scenarios.
(*2) Differences in the rate of wage growth will also have an impact, but the impact of differences in the rate of price growth
will be larger because the expenditure weights involved with wage growth are relatively small.

14

<BOX 2> Factors affecting the PB change in FY2025
The PB for the central and local governments in FY2025 is projected be around -1.3 trillion
yen (-0.2% of GDP) in the Economic Growth Achieved Case, an improvement of about 0.2
trillion yen from the Economic Growth Achieved Case projected in January 2023.
As for revenue, while an underlying increase in tax revenues based on an upward revisionof tax revenues in the Provisional FY2022 Settlement and recent economic trends is assumed,a decrease in revenues due to a decline in nominal GDP growth from the previous projection
reflecting the latest economic trends, etc., contributes slightly to the deterioration of the PB
in FY2025.
As for expenditure side, while there is an increase in expenditures due to the rise in the
inflation rate, etc. from the previous projections, a decrease in expenditures due to amechanical calculation based on an assumption that the expenditure in FY2024 is reduced byabout half of the amount that the expenditure reform could curve if it is continued (the same
assumption as in past projections), contributes to an improvement in the PB in FY2025.

Factors of the PB change in FY2025(appx. trillion Yen)
Contribution toPrimary balance

the PBin FY 2025

－ 1.5

Primary balance in January 2023 projection
Factors on revenue side・assumption on the underlying tax revenue
growth・downswing of the nominal GDP growth rate

＋ 1.2
－ 1.4

Factors on outlays side・upswing of the inflation rate

－ 0.2

・assumption on the expenditure reform

＋ 0.7
－ 1.3

Primary balance in July 2023 projection(Notes) 1. Considerable leeway should be given when interpreting this table, including assumptions on this projection.
2. Figures in this table are rounded to the nearest unit, so the sum of factors and the change of PB do not match.

15

4. Risk and Uncertainty
The medium to long term economic and fiscal projections described so far entail various risks
and uncertainties. In the short term, there is a risk that a downturn in overseas economies puts
downward pressure on Japanese economy, and it is also necessary to pay close attention to rising
prices, fluctuations in financial and capital markets, and other factors. Furthermore, looking at
the medium to long term time horizon, for example, risks and uncertainties that follow are
included. 21
In order to understand the path and quantitative effect of external impacts of these risks anduncertainties on the Japanese economy and public finances, we conduct a sensitivity analysis
based on mechanical calculations of the impact of a decline in the growth rate and an increasein nominal long-term interest rates. Please note that this sensitivity analysis is conductedmechanically, and is not discussed with specific scenarios or specific policy changes in mind.
i) Changes in medium to long term economic growth
The IMF World Economic Outlook22 points out several downside risks to global economic
growth due to such factors as demand restraint coming from monetary tightening, continued
price hikes, high levels of public and private debt in emerging and developing countries, a
slowdown in the Chinese economy, Russian aggression against Ukraine, and geopolitical andgeoeconomic fragmentation. 23 Such a downturn in the global economy puts downward pressure
on production and corporate performance through lower exports, etc. If this impact is prolonged,
it will have a negative impact on Japan's medium to long term economic growth throughsluggish investment, etc.24
In the current domestic economy, while there are some factors that could move the medium
to long term growth path upward, such as the ongoing digitalization triggered by the COVID19 pandemic, wage hikes, and continued high investment motivation, there are also factors that
could move the path downward, such as a decline in the expected medium to long term growthrate amid greater economic volatility.
In the following, we conduct a sensitivity analysis based on a mechanical calculation of the
impact of a decline in the potential growth rate. Here, we assume that the rate of increase in TFPThose listed here are examples. Risks and uncertainties are not limited to these.
While the IMF (2023a) cites as upside risks an increase in household consumption on the back of excess savings
from COVID-19 and a tight labor market, as well as the resolution of supply chain fragmentation and stabilizationof the labor market, the downside risks are considered more significant. As external risks to Japan's economic
growth, the IMF (2023b) cites geoeconomic fragmentation and geopolitical tensions, a sharp slowdown in the
global economy, commodity price volatility, natural disasters, and cyber threats. Regarding the oil prices in the
future, the World Bank (2023) points to the risk of higher prices, such as higher demand in China and lower
production in OPEC+ (plus), the U.S., and other countries, as well as the risks of lower prices due to lower
demand accompanying lower growth in the global economy.
23
Geoeconomic fragmentation refers to the dissolution of policy-based economic integration based on strategic
thinking such as security and autocracy (Aiyar et al., 2023).
24
For related analysis, see Cabinet Office Director General for Economic Research (2023), Chapter 1, Section 3.
21
22

16

was continuously reduced by about 0.5 percentage points relative to the Baseline Case. As aresult, combined with a decrease in capital input, the potential growth rate declined by about
0.8% pt in the final year of the estimation period (FY2032). Due to the revenue decline resulting
from the lower growth rate, the ratio of PB to GDP deteriorated by about 0.8% pt and the ratioof outstanding debt to GDP increased by about 8.2% pt in the final year of the projection period.

17

Figure 12. Lower Potential Growth Rate Case(%)
4(1) Primary Balance of Central and Local Governments Combined (Ratio to Nominal GDP)
Economic Growth Achieved Case

2

1.7
-0.4

0
-2

Baseline Case

-1.2

Lower Potential Growth Rate Case

-4
-6
-8
-10

20

2019

(%)

21

22

23

24

25

26

27

28

30

29

31

32
(FY)

(2) Outstanding Debt of Central and Local Govenrments Combined (Ratio to Nominal GDP)

220
Lower Potential Growth Rate Case
214.8

210

206.6

200

Baseline Case

190

Economic Growth Achieved Case

180
170.7
170
160

2019

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

(3) Table(%), [Ratio to Nominal GDP %], Trillions of Yen

FY

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Potential Growth Rate

( 0.2)( 0.3)( 0.6)( 0.9)( 0.4)( 0.2)( 0.1)( 0.0)(▲0.2)(▲0.2)(▲0.3)(▲0.4)

Nominal GDP

550.7

561.9

586.4

601.3

608.2

611.3

613.5

615.2

615.7

616.0

616.4

616.3

Primary Balance of Central andLocal Government Combined(Ratio to Nominal GDP)[▲5.5][▲5.0][▲4.7][▲0.8][▲0.4][▲0.2][▲0.3][▲0.4][▲0.6][▲0.8][▲1.0][▲1.2]

Outstanding Debt
(Ratio to Nominal GDP)[ 212.3][ 213.5][ 210.6][ 206.9][ 205.8][ 206.1][ 206.8][ 207.8][ 209.3][ 211.0][ 212.8][ 214.8](Notes) 1. This sensitivity analysis is based on the multiplier table in "Economic and Fiscal Model (FY2018 version)".
2. The low potential growth rate case refers to a case in which the TFP growth rate is 0.5%pt lower than the baseline casecontinuously during the projection period (after FY2025) under conditions in which other exogenous variables remain unchanged.

18

(ii) Rise in interest rates
Since the end of 2021, as overseas long-term interest rates have risen, there was a phase wheremonetary tightening by Europe and the U.S. put upward pressure on interest rates in Japan.
A rise in long-term interest rates could have several impacts on the economy and publicfinance through various channels.25 For example, by restraining investment, etc., it could havea negative impact on the real economy. If nominal long-term interest rates rise relative to thenominal GDP growth rate, by worsening the fiscal balance and increasing the ratio ofoutstanding debt, etc., to the GDP, it could have a negative impact on fiscal conditions.
In the following, we conduct a sensitivity analysis based on a mechanical estimate of the
impact of a rise in long-term interest rates. Specifically, we set the long-term interest rate tocontinuously rise by about 0.5% pt relative to each case. Since interest expenses increased dueto the rise in interest rates on newly issued and refinanced bonds, the ratio of the outstanding
debt to GDP rose by about 2.8% pt in the final year of the projection period in both cases.

25

As for the economic impact of a rise in long-term interest rates, see, for example, Cabinet Office Director Generalfor Economic Research (2005), Chapter 2, Section 1.

19

Figure 13. Higher Long-term Interest Rate Case(%)
220(1) Outstanding Debt of Central and Local Govenrments Combined (Ratio to Nominal GDP)
Higher Long-term Interest Rate Case(vs. Baseline Case)

210

209.4

206.6
Baseline Case
Higher Long-term Interest Rate Case(vs. Economic Growth Achieved Case)

200
190
180

173.5

Economic Growth Achieved Case

170
160

170.7

2019

20

21

22

23

24

25

26

27

28

30

29

31

32
(FY)

(2) Table＜vs. Baseline Case＞
FY(%), [Ratio to Nominal GDP %]

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Nominal Long-term Interest Rate

( 0.1)( 0.3)( 0.4)( 0.4)( 0.9)( 1.0)( 1.0)( 1.1)( 1.1)( 1.2)( 1.3)( 1.4)

Outstanding Debt
(Ratio to Nominal GDP)[ 212.3][ 213.5][ 210.6][ 206.9][ 205.5][ 205.3][ 205.4][ 205.6][ 206.4][ 207.1][ 208.1][ 209.4]

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Nominal Long-term Interest Rate

( 0.1)( 0.3)( 0.4)( 0.4)( 0.9)( 1.1)( 1.4)( 2.0)( 2.5)( 2.9)( 3.3)( 3.7)

Outstanding Debt
(Ratio to Nominal GDP)[ 212.3][ 213.5][ 210.6][ 206.9][ 203.3][ 198.6][ 193.6][ 188.8][ 184.4][ 180.3][ 176.7][ 173.5]＜vs. Economic Growth Achieved Case＞
FY(%), [Ratio to Nominal GDP %](Notes) 1. This sensitivity analysis is based on the multiplier table in "Economic and Fiscal Model (FY2018 version)".
2. The higher long-term interest rate case refers to a case in which long-term interest rates were 0.5%pt higher than those in both cases
continuously during the projection period (after FY2025) under conditions in which other exogenous variables remain unchanged.

20

(iii) Response to economic fluctuations, etc.
When various economic shocks have occurred, there has often been additional fiscal spending
to deal with the crisis. The ratio of central and local governments outstanding debt to GDP roseby about 100% pt over the past 20 years (FY2002-2022), but especially by about 40% pt 26 in
the five years following the Great Recession and the response to the COVID-19 pandemic.
While it is desirable for the economy to stabilize at an early stage through the fiscal adjustment
in response to large shocks, supplementary budgets have been compiled in the past as a flexible
response to occasional economic conditions, even when the shocks are not as large as the GreatRecession or the pandemic. In the past, the policy expenditures related to the primary balancein the general account of the central government 27 have tended to swing upward from the initialbudgets to the settlement of accounts, at an average of about 3 trillion yen per year 28 from
FY2013 to FY2019.
Supplementary budgets in the general account are compiled in cases of particular urgency
under the Public Finance Act, 29 and this projection shows figures that do not incorporate such
expenditures that are not specifically envisioned at this time. While the government works toprevent emergency fiscal spending from becoming more prolonged and permanent thannecessary, at the same time, it is necessary to realize wise spending so that the spending has ahigh effect on stable economic growth.

In addition to the above, various uncertainties are involved, such as the impact of wage
negotiations on wage trends, the impact of the price pass-on situation on price and wage trends,
and the continuity of the upward trends in tax revenues, etc. Therefore, considerable leeway
should be given when interpreting the projections shown here.
It is important that these risks and uncertainties be kept in mind when discussing medium andlong term economic and fiscal policy, and in order to contribute to these discussions, it is usefulto show the impact of these risks and uncertainties in the medium- and long-term projections.

Changes in the ratio of outstanding debt to GDP in FY2009-2010 and FY2020-2022. The outstanding debt has
increased by about 600 trillion yen over the past 20 years, of which about 230 trillion yen, or about 40%, has
increased over the past five years.
27
Total expenditures less interest payments and debt redemption costs (excluding subsidy bonds).
28
Average of the difference between the initial budget and the closing primary budgeted expenses of the generalaccount for FY2013-FY2019. Note that the pre-Great Recession period, FY2002-2008, was about 2 trillion yen.
29
Article 29 of the Public Finance Act.
26

21

<BOX 3> Fan chart of real GDP growth
As considerable leeway should be given when interpreting the medium to long term
projections shown here, one method for examining that range is fan chart analysis, whichshows the projected distribution of estimates. Here, a fan chart is created for the uncertainty
regarding the projection of real GDP growth in the Baseline Case, with reference to themethodology from the Office for Budget Responsibility (OBR) in the UK.(*) The past forecast
error is applied to each year of the analysis period (FY2025 to FY2029) setting the baseline
estimate as a standard value (the median of the probability distribution), using stochastic
simulation.
The results of this analysis indicate that there is an 80% probability that the actual GDP
growth rate falls within a range of about ±2% pt around the Baseline estimate. For real GDP
growth in FY2029 (the baseline case is 0.5%), the top 10% threshold is 2.2% and the bottom
10% threshold is -1.6%, resulting in a slightly larger downside magnitude. As the baseline
real GDP growth rate declines, the probability of a swing to negative growth increases.
Real GDP Growth Rate Fan Chart
(%)
4
3
2
1
0
-1
-2
-3
-4
-5
2019

Probability
top 10 to 20%
top 20 to 30%＋2.2％

top 30 to 40%
top 40 to 50%＋0.5％bottom 40 to 50%-1.6％

bottom 30 to 40%
bottom 20 to 30%
bottom 10 to 20%

20

21

22

23

24

25

26

27

28

29
(FY)

(Notes)1. Computed using a stochastic simulation based on vector auto regression and bootstrap methods.
2. Data from FY 1981 to FY 2022 is used.
3. The analysis period is set for five years according to the custom of international and foreign institutions.
(*) See Steel (2021). In addition to the OBR methodology referenced here, similar methods are used by the Congressional
Budget Office (CBO) in the US, the IMF, the European Commission, and other agencies that make forecasts to indicate
the range of their estimates.

22

<BOX 4> Analysis of Reference CaseIn the Economic Growth Achieved Case, the TFP growth rate is assumed to reach about
1.4%, which is the average TFP growth in the period before entering the deflationary
situation. Here an alternative scenario with a different TFP growth rate assumption is studied.
In this “Reference Case” the TFP growth rate is assumed to reach about 1.1%, which is theaverage of the past 40 years,(*1) and the estimates of a couple of economic and fiscal variables
are conducted.(*2)
In terms of the economy, both potential growth and real GDP growth are estimated to reachthe mid-1% range in the second half of the 2020s. In addition, the real GDP per capita growthrate is estimated to be around 2%.
From the fiscal perspective, although the growth rate is lower than in the Economic Growth
Achieved Case, the PB-to-GDP ratio for central and local governments combined is estimatedto return to surplus in FY2026, and if the efforts for expenditure efficiency are continued, thePB surplus will be achieved in FY2025, around one year earlier, as in the Economic Growth
Achieved Case. Thereafter, since the PB-to-GDP ratio is estimated to continue to improve,the ratio of outstanding debt to GDP is estimated to decline, albeit at a slower pace than in the
Economic Growth Achieved Case.
Economic and Fiscal Pictures of the Reference Case(%)
Potential Growth Rate
4
3

Projection

2
1

1.5

0.9

0.3

1.3

0
-1
-2
-3
-4
-5

2019

20

21

22

23

24

25

26

27

28

29

30

31

32

Growth Rate of Real GDP

(%)
4

(FY)

3
2

1.4

1.3

1.6

1.2

1

1.3

0
-1

Mid-year
Projection
Economic
Projection
for FY2023

-2
-3
-4
-5

2019

20

21

22

23

24

25

23

26

27

28

29

30

31

32

(FY)

Growth Rate of Real GDP Per Capita

(%)
4
3

1.8

2

2.1

1.6

1.9

1
0
-1
-2

Projection

-3
-4
-5

2019

20

21

22

23

24

25

26

27

28

29

30

31

32

(FY)

Primary Balance of Central and Local Governments Combined(Ratio to Nominal GDP)(%)
4

Projection

2

1.2

0.3

0
-2

-0.2

-2.6

-4

-5.5

-6
-8
-10

(%)
230

-9.1

2019

20

21

22

23

24

25

26

27

28

29

30

31

32

(FY)

Outstanding Debt of Central and Local Govenrments Combined(Ratio to Nominal GDP)

220

212.3

213.5

210
200
190
180

175.2

170

Projection

160
150

2019

20

21

22

23

24

25

26

27

28

29

30

(*1) Average rate of increase in TFP from Apr-Jun 1980 to Apr-Jun 2020.
(*2) Estimates are made using the multiplier table in the Economic and Fiscal Model (2018 version).

24

31

32

(FY)

<BOX 5> The rate of increase in TFP
Total Factor Productivity (TFP) represents the increase in value added that is not
attributable to increases in capital and labor input, which includes, for example, technologicalprogress (development of product services and upgrading of machinery and equipment),
improvements in worker capacity, and more efficient allocation of production resources.
A couple of previous studies on the effects of the policies on economic growth rates are
summarized in the table below. The government’s policy of fostering investment in humancapital, investment in GX/DX, and promotion of startups is expected to have similar effects.

Growth-pushing effect based on previous studies
Push-up effects(annualized)
About 0.1% pt.

Assumptions

References

Investment in

human capital

Investment in education and training bycompanies (stock per employee) rises 5% (Labor productivity growth Morikawa(2018a,b)
annually(*1)
rate(*2))

About 0.2% pt
Ratio of part-time workers declines 0.5% pt
Morikawa(Labor productivity growth(*3)(2018a,b)
annually
rate)

GX/DX and otherinvestments

R&D investment to GDP ratio increases by 0.5%
pt(*4)

About 0.2% pt(Rate of increase in TFP)

Morikawa(2015)

Green public investment (from 1% of GDP to
About 0.1% pt
zero after 10 years), subsidies for renewable(GDP increase by about 2% IMF(2020)
energy (80% subsidy rate), carbon pricing
in about 15 years)(increase of about 7% per year), etc.

Promotion of startups, etc.

Regarding the score on administrative barriers to
About 0.1% pt
startups (OECD Product Market Regulation(GDP per capita increase OECD(2021)
Index), Japan attains the lowest barriers in theby about 0.6% in 10 years)
OECD (0.6 points to 0 points in 2018)
The TFP-pushing effect of firms' entry/exit andreallocation doubles compared to the mid2010s(*5)

About 0.2% pt(Rate of increase in TFP)

Kim, Fukao, Gon,
Ikeuchi (2023)(Notes) The purpose of the figures presented here is to provide an approximate magnitude of the policy effects.
In light of the analysis limitations and caveats as described below, these figures presented should beunderstood with considerable latitude in their interpretation and application.
① assumptions and policies do not match completely.
② assumptions regarding the push-up effect are based on past and foreign analyses, etc., and need to
be kept in mind when applying the effect to Japan's economy.
③ there is no explicit consideration of the time lag that may exist between the implementation of thepolicy and the manifestation of its effects.
④ those shown as level effects are simply converted to growth rate push-up effects.

25

To evaluate the actual policy packages comprehensively, while overlapping effects andinteractions among policies must be kept in mind, the approximate magnitude and directionof the policies can be estimated by adding up the individually measured policy effects. For
example, regarding the growth-pushing effects in the above research examples, the direct
effects on TFP and labor productivity (totaling about 0.7% pt) can be added to the current
TFP growth rate of about 0.5%, resulting in a TFP growth rate of slightly more than 1%. Thisis equivalent to the average rate of increase in TFP over the past 40 years, up to the mostrecent business cycle (the most recent business cycle assumed in the Baseline Case),(*6) andis also comparable to the rate of increase in TFP assumed in the US.(*7)
Even greater growth-raising effects are expected by adding policies that have not been
quantified here and by materializing and accelerating policies that have already begun to
move. At present, the policy effects are not sufficiently quantified for many policies. It is
hoped that studies of the policy effects will be promoted in the comprehensive examinationof policies that contribute to growth from the perspective of EBPM. (*8)(*1) The amount of intangible assets that can be calculated from investment in human capital such as corporate
training expenses is about 3.1 trillion yen in 2021 (from JIP Database). This 5% increase is about 150 billion
yen. Note that a package of human investment measures worth 1 trillion yen over five years is implemented.
(*2) Labor productivity here is the amount of value added per worker. Labor productivity is often used as a
productivity indicator instead of TFP because it is easier to measure than TFP.
(*3) The ratio of non-regular employees declined from 38.3% in 2019 to 36.9% in 2022, an average annual
decline of about 0.5% pt.
(*4) The amount of R&D investment is about 20 trillion yen in FY2021 (about 3.6% of GDP, based on the"Survey on Science and Technology Research" by the Ministry of Internal Affairs and Communications).
Note that the guideline for investment in the "Sixth Science, Technology and Innovation Basic Plan"(FY2021-2025) is an annual average of about 24 trillion yen, and R&D investment is expected to increase.
(*5) According to Kim, Fukao, Gong, and Ikeuchi (2023), the TFP-pushing effect of firms' entry/exit andreallocation is about 0.2% pt per year from 2012 to 2018. Note that the average rate of business openings
and closings during 2012-2018 is about 6% in Japan, while it is about 19% in the US and 25% in the UK,
more than twice as high.
(*6) TFP growth rate for the Reference Case analyzed in BOX 4.
(*7) CBO (2023). The TFP growth rate set for the US economy for 2023-33 is 1.1% (non-farm private sector).
(*8) Evidence-Based Policy Making.

26

Results of Projection (Table)
Economic Growth Achieved Case(%), [ratio to GDP, %], Trillions of Yen【Macroeconomy】

FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Potential GDP Growth( 0.2)( 0.3)( 0.6)( 0.9)( 1.3)( 1.6)( 1.8)( 1.9)( 1.9)( 1.8)( 1.8)( 1.7)

Real GDP Growth( 2.6)( 1.4)( 1.3)( 1.2)( 1.3)( 1.6)( 1.8)( 1.9)( 1.9)( 1.8)( 1.8)( 1.7)

Real GNI Growth( 2.2)( 0.5)( 2.1)( 1.3)( 1.7)( 1.7)( 1.8)( 1.9)( 1.8)( 1.8)( 1.8)( 1.7)

Nominal GDP Growth( 2.4)( 2.0)( 4.4)( 2.5)( 2.5)( 3.0)( 3.2)( 3.3)( 3.3)( 3.2)( 3.2)( 3.2)

Nominal GDP

550.7

561.9

586.4

601.3

616.3

634.9

655.5

677.1

699.1

721.5

744.6

768.3

Real GDＰ Per Capita Growth( 3.1)( 1.8)( 1.8)( 1.7)( 1.7)( 2.1)( 2.3)( 2.4)( 2.4)( 2.4)( 2.3)( 2.3)

Nominal GNI Per Capita (※Ten thousand yen)

462

478

500

516

531

548

567

588

609

631

654

678

Wage Growth( 1.8)( 1.9)( 2.6)( 2.5)( 2.6)( 3.0)( 3.2)( 3.4)( 3.4)( 3.3)( 3.3)( 3.2)

Unemployment Rate

( 2.8)( 2.6)( 2.5)( 2.4)( 2.4)( 2.5)( 2.5)( 2.5)( 2.6)( 2.6)( 2.6)( 2.6)

Consumer Prices( 0.1)( 3.2)( 2.6)( 1.9)( 1.8)( 2.0)( 2.0)( 2.0)( 2.0)( 2.0)( 2.0)( 2.0)GDP Deflator(−0.2)( 0.6)( 3.0)( 1.3)( 1.2)( 1.4)( 1.4)( 1.4)( 1.4)( 1.4)( 1.4)( 1.4)( 0.1)( 0.3)( 0.4)( 0.4)( 0.4)( 0.6)( 0.9)( 1.5)( 2.0)( 2.4)( 2.8)( 3.2)

General Government[−5.9][−4.8][−4.7][−0.5][ 0.2][ 0.8][ 1.0][ 1.1][ 1.1][ 1.1][ 1.1][ 1.0]

Households[ 5.8][ 3.4][ 2.4][ 2.2][ 2.3][ 2.4][ 2.4][ 2.4][ 2.4][ 2.5][ 2.6][ 2.6]

Corporations[ 3.7][ 3.1][ 4.8][ 0.8][ 0.4][−0.3][−0.5][−0.7][−0.7][−0.8][−0.9][−0.9]

Overseas[−3.6][−1.7][−2.5][−2.5][−2.9][−2.9][−2.8][−2.8][−2.8][−2.8][−2.8][−2.8]

Change of Price

Nominal Long-term Interest Rate
Balance by Sector【Central and Local Governments' Public Finances】(Excluding the expenditures and the fiscal resources for the recovery and reconstruction measures and GX measures)[ratio to GDP, %], Trillions of Yen

FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Primary Balance− 30.4− 27.8− 27.7

− 4.8

− 1.3

2.3

4.3

5.9

7.7

9.4

11.2

12.9

(ratio to nominal GDP)[−5.5][−5.0][−4.7][−0.8][−0.2][ 0.4][ 0.7][ 0.9][ 1.1][ 1.3][ 1.5][ 1.7]

Central Government− 35.6− 30.7− 33.0− 11.3

− 9.4

− 7.4

− 6.3

− 5.3

− 4.5

− 3.8

− 3.1

− 2.4

(ratio to nominal GDP)[−6.5][−5.5][−5.6][−1.9][−1.5][−1.2][−1.0][−0.8][−0.6][−0.5][−0.4][−0.3]

Local Government

5.2

2.9

5.3

6.5

8.1

9.7

10.6

11.2

12.2

13.2

14.3

15.2

(ratio to nominal GDP)

[0.9]

[0.5]

[0.9]

[1.1]

[1.3]

[1.5]

[1.6]

[1.7]

[1.7]

[1.8]

[1.9]

[2.0]

− 36.5− 33.7− 33.4

− 9.0

− 5.1

− 1.8

− 0.4

0.3

0.8

0.8

0.5

− 0.3

(ratio to nominal GDP)[−6.6][−6.0][−5.7][−1.5][−0.8][−0.3][−0.1][ 0.0][ 0.1][ 0.1][ 0.1][−0.0]

Central Government− 40.7− 35.4− 37.6− 14.5− 12.3− 10.6− 10.1− 10.2− 10.8− 11.8− 13.2− 15.0(ratio to nominal GDP)[−7.4][−6.3][−6.4][−2.4][−2.0][−1.7][−1.5][−1.5][−1.5][−1.6][−1.8][−2.0]

Local Government

4.2

1.7

4.3

5.5

7.2

8.8

9.7

10.5

11.6

12.6

13.7

14.7

(ratio to nominal GDP)

[0.8]

[0.3]

[0.7]

[0.9]

[1.2]

[1.4]

[1.5]

[1.5]

[1.7]

[1.7]

[1.8]

[1.9]

1168.91199.91235.11243.81251.41257.6

1263.41269.51277.11286.41297.71311.5(ratio to nominal GDP)

[212.3][213.5][210.6][206.9][203.0][198.1][192.7][187.5][182.7][178.3][174.3][170.7]

Central Government

994.7

1029.01069.11083.71097.91110.61122.91135.51149.01163.81180.21198.7(ratio to nominal GDP)

[180.6][183.1][182.3][180.2][178.1][174.9][171.3][167.7][164.3][161.3][158.5][156.0]Local Government

174.2

170.9

166.1

160.1

153.5

147.0

140.4

134.1

128.1

122.6

117.5

112.8

(ratio to nominal GDP)

[31.6][30.4][28.3][26.6][24.9][23.1][21.4][19.8][18.3][17.0][15.8][14.7]

Fiscal Balance

Outstanding Debt

【General Account of Central Government】

Trillions of Yen

FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Expenditures

144.6

132.4

114.4

111.6

114.3

115.4

118.3

121.6

125.6

130.2

135.1

140.6

(Policy Expenditures)

120.5

108.9

89.5

87.0

88.9

89.4

91.4

93.4

95.6

97.9

100.1

102.5

Social Security-related Expenditures

50.2

43.9

36.9

37.6

38.4

39.2

40.1

41.0

42.0

42.9

43.8

44.8

Local Allocation Tax Grants, etc.

19.6

17.5

16.4

17.9

18.6

19.1

19.8

20.2

20.8

21.5

22.2

22.9

Others

50.3

47.1

35.8

31.2

31.6

30.7

31.1

31.8

32.4

33.1

33.7

34.4

Bond Expenditures

24.6

23.9

25.3

24.9

25.8

26.4

27.3

28.6

30.4

32.7

35.4

38.5

Debt Repayment

17.0

16.3

16.4

17.0

17.6

17.9

18.1

18.3

18.6

18.9

19.3

19.7

Interest Payment

7.2

7.1

8.5

7.5

7.7

8.1

8.8

9.8

11.4

13.4

15.7

18.4

89.3

85.3

78.8

80.0

82.5

84.9

88.1

91.1

94.0

97.1

100.2

103.3

Tax Revenue

67.0

71.1

69.4

72.0

74.5

76.7

79.2

81.9

84.5

87.2

90.0

92.8

Other Revenues

22.2

14.2

9.3

8.0

8.1

8.2

8.9

9.2

9.5

9.8

10.2

10.5

− 31.2− 23.6− 10.8

− 7.0

− 6.3

− 4.5

− 3.3

− 2.3

− 1.6

− 0.8

0.0

0.8

Revenues

Primary Balance in General Account of Central Government【Ordinary Account of Local Government】
FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Expenditures
Debt Repayment and Interest Payment
Revenues
Tax Revenue
Primary Balance in Ordinary Account of Local Government

122.4

106.7

100.2

103.9

106.8

107.1

109.9

112.7

115.8

119.0

122.5

126.0

12.6

11.4

11.3

11.5

12.2

12.1

12.0

11.9

11.5

11.3

11.0

10.9

109.1

95.4

90.0

94.4

97.2

98.6

101.4

104.2

107.3

110.7

114.2

118.0

44.8

46.7

46.5

48.4

50.0

51.5

53.0

54.7

56.5

58.2

60.0

61.8

4.6

3.9

4.9

6.0

7.2

8.8

9.6

10.4

11.5

12.8

14.3

15.9

Notes 1. In "General Account of Central Government", FY2021 is based on the Settlement, FY2022 is based on theProvisional FY2022 Settlement, and FY2023 is based on the FY2023 Budget. In "Ordinary
Account of Local Government," FY2021 is based on the Settlement.
2. "Policy Expenditures" is General Account Expenditures excluding interest payments, redemption of the national debt (excluding subsidy bonds) and carry-back of settlement deficit compensation.
3. Debt Repayment in Bond Expenditures excludes subsidy bonds.
4. In "General Account of Central Government," "Other Revenues" in FY2021 and FY2022 consist of non-tax revenues and preceding fiscal year surplus received (around 44.7 trillion yen in FY2021 andaround 32.1 trillion yen in FY2022) excluding the balance of fiscal resources carried forward to the next year (around 22.4 trillion yen in FY2021 and around 18.0 trillion yen in FY2022).
5. In "Ordinary Account of Local Government," "Revenues" excludes local bonds, reduction of reserve, and the balance of fiscal resources carried forward from total revenues. "Tax Revenue" is the totalsum of local taxes and local transfer taxes.

27Baseline Case(%), [ratio to GDP, %], Trillions of Yen【Macroeconomy】

FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Potential GDP Growth( 0.2)( 0.3)( 0.6)( 0.9)( 0.9)( 0.7)( 0.6)( 0.6)( 0.5)( 0.5)( 0.5)( 0.4)

Real GDP Growth( 2.6)( 1.4)( 1.3)( 1.2)( 0.8)( 0.7)( 0.6)( 0.6)( 0.5)( 0.5)( 0.5)( 0.4)

Real GNI Growth( 2.2)( 0.5)( 2.1)( 1.3)( 1.2)( 0.9)( 0.6)( 0.6)( 0.6)( 0.6)( 0.6)( 0.6)

Nominal GDP Growth( 2.4)( 2.0)( 4.4)( 2.5)( 1.4)( 0.9)( 0.8)( 0.7)( 0.6)( 0.6)( 0.6)( 0.5)

Nominal GDP

550.7

561.9

586.4

601.3

609.9

615.3

620.0

624.5

628.3

631.8

635.4

638.7

Real GDＰ Per Capita Growth( 3.1)( 1.8)( 1.8)( 1.7)( 1.3)( 1.2)( 1.2)( 1.1)( 1.0)( 1.0)( 1.0)( 1.0)

Nominal GNI Per Capita (※Ten thousand yen)

462

478

500

516

526

532

537

543

550

556

562

568

Wage Growth( 1.8)( 1.9)( 2.6)( 2.5)( 1.6)( 1.0)( 0.9)( 0.9)( 0.9)( 0.9)( 0.8)( 0.8)

Unemployment Rate

( 2.8)( 2.6)( 2.5)( 2.4)( 2.4)( 2.5)( 2.5)( 2.5)( 2.6)( 2.6)( 2.6)( 2.6)

Consumer Prices( 0.1)( 3.2)( 2.6)( 1.9)( 1.2)( 0.8)( 0.7)( 0.7)( 0.7)( 0.7)( 0.7)( 0.7)GDP Deflator(−0.2)( 0.6)( 3.0)( 1.3)( 0.6)( 0.2)( 0.1)( 0.1)( 0.1)( 0.1)( 0.1)( 0.1)( 0.1)( 0.3)( 0.4)( 0.4)( 0.4)( 0.5)( 0.5)( 0.6)( 0.6)( 0.7)( 0.8)( 0.9)

General Government[−5.9][−4.8][−4.7][−0.5][−0.2][ 0.1][−0.1][−0.2][−0.4][−0.7][−0.7][−0.7]

Households[ 5.8][ 3.4][ 2.4][ 2.2][ 2.2][ 2.2][ 2.2][ 2.1][ 2.0][ 2.0][ 2.0][ 2.0]

Corporations[ 3.7][ 3.1][ 4.8][ 0.8][ 0.9][ 0.7][ 0.7][ 0.8][ 1.0][ 1.3][ 1.3][ 1.3]

Overseas[−3.6][−1.7][−2.5][−2.5][−2.9][−3.0][−2.8][−2.7][−2.6][−2.6][−2.6][−2.6]

Change of Price

Nominal Long-term Interest Rate
Balance by Sector【Central and Local Governments' Public Finances】(Excluding the expenditures and the fiscal resources for the recovery and reconstruction measures and GX measures)[ratio to GDP, %], Trillions of Yen

FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Primary Balance− 30.4− 27.8− 27.7

− 4.8

− 2.3

− 0.2

− 0.1

− 0.4

− 0.9

− 1.3

− 1.7

− 2.4

(ratio to nominal GDP)[−5.5][−5.0][−4.7][−0.8][−0.4][−0.0][−0.0][−0.1][−0.1][−0.2][−0.3][−0.4]

Central Government− 35.6− 30.7− 33.0− 11.3

− 9.7

− 8.4

− 8.1

− 7.9

− 8.2

− 8.4

− 8.6

− 9.1

(ratio to nominal GDP)[−6.5][−5.5][−5.6][−1.9][−1.6][−1.4][−1.3][−1.3][−1.3][−1.3][−1.3][−1.4]

Local Government

5.2

2.9

5.3

6.5

7.4

8.2

8.0

7.6

7.3

7.1

6.9

6.7

(ratio to nominal GDP)

[0.9]

[0.5]

[0.9]

[1.1]

[1.2]

[1.3]

[1.3]

[1.2]

[1.2]

[1.1]

[1.1]

[1.1]

− 36.5− 33.7− 33.4

− 9.0

− 6.2

− 4.2

− 4.5

− 5.1

− 5.9

− 6.6

− 7.4

− 8.6

(ratio to nominal GDP)[−6.6][−6.0][−5.7][−1.5][−1.0][−0.7][−0.7][−0.8][−0.9][−1.0][−1.2][−1.3]

Central Government− 40.7− 35.4− 37.6− 14.5− 12.6− 11.5− 11.6− 11.9− 12.4− 13.0− 13.6− 14.6(ratio to nominal GDP)[−7.4][−6.3][−6.4][−2.4][−2.1][−1.9][−1.9][−1.9][−2.0][−2.1][−2.1][−2.3]

Local Government

4.2

1.7

4.3

5.5

6.4

7.2

7.1

6.7

6.5

6.3

6.2

6.0

(ratio to nominal GDP)

[0.8]

[0.3]

[0.7]

[0.9]

[1.1]

[1.2]

[1.1]

[1.1]

[1.0]

[1.0]

[1.0]

[0.9]

1168.91199.91235.11243.81252.01259.81267.6

1276.11285.51295.81307.01319.5(ratio to nominal GDP)

[212.3][213.5][210.6][206.9][205.3][204.7][204.5][204.3][204.6][205.1][205.7][206.6]

Central Government

994.7

1029.01069.11083.71098.41112.41126.31140.71155.61171.21187.51204.7(ratio to nominal GDP)

[180.6][183.1][182.3][180.2][180.1][180.8][181.7][182.7][183.9][185.4][186.9][188.6]

Local Government

174.2

170.9

166.1

160.1

153.5

147.4

141.3

135.4

129.9

124.6

119.5

114.8

(ratio to nominal GDP)

[31.6][30.4][28.3][26.6][25.2][24.0][22.8][21.7][20.7][19.7][18.8][18.0]

Fiscal Balance

Outstanding Debt

【General Account of Central Government】

Trillions of Yen

FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Expenditures

144.6

132.4

114.4

111.6

113.8

113.8

115.2

116.3

117.6

119.0

120.4

122.0

(Policy Expenditures)

120.5

108.9

89.5

87.0

88.4

88.0

88.7

89.2

90.0

90.7

91.4

92.2

Social Security-related Expenditures

50.2

43.9

36.9

37.6

38.3

38.7

39.2

39.7

40.2

40.6

41.0

41.4

Local Allocation Tax Grants, etc.

19.6

17.5

16.4

17.9

18.3

18.5

18.6

18.5

18.5

18.6

18.7

18.8

Others

50.3

47.1

35.8

31.2

31.4

30.4

30.5

30.7

30.9

31.1

31.3

31.6

Bond Expenditures

24.6

23.9

25.3

24.9

25.8

26.3

26.9

27.4

28.0

28.6

29.4

30.2

Debt Repayment

17.0

16.3

16.4

17.0

17.6

17.9

18.1

18.3

18.6

18.8

19.1

19.4

Interest Payment

7.2

7.1

8.5

7.5

7.7

8.0

8.4

8.7

9.1

9.4

9.9

10.4

89.3

85.3

78.8

80.0

81.4

82.2

83.3

83.8

84.3

84.8

85.3

85.8

Tax Revenue

67.0

71.1

69.4

72.0

73.4

74.1

74.6

75.1

75.5

75.9

76.3

76.7

Other Revenues

22.2

14.2

9.3

8.0

8.0

8.1

8.6

8.7

8.8

8.9

9.0

9.1

− 31.2− 23.6− 10.8

− 7.0

− 6.9

− 5.8

− 5.4

− 5.4

− 5.7

− 5.9

− 6.1

− 6.4

Revenues

Primary Balance in General Account of Central Government【Ordinary Account of Local Government】
FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032
Expenditures
Debt Repayment and Interest Payment
Revenues
Tax Revenue
Primary Balance in Ordinary Account of Local Government

122.4

106.7

100.2

103.9

105.6

104.7

105.4

105.9

106.4

106.9

107.5

108.1

12.6

11.4

11.3

11.5

12.2

12.1

12.0

11.9

11.5

11.2

10.9

10.7

109.1

95.4

90.0

94.4

96.0

95.5

96.1

96.4

96.9

97.5

98.1

98.7

44.8

46.7

46.5

48.4

49.3

49.7

50.0

50.4

50.7

50.9

51.2

51.5

4.6

3.9

4.9

6.0

6.5

7.2

7.0

6.5

6.2

6.0

5.8

5.5

Notes 1. In "General Account of Central Government", FY2021 is based on the Settlement, FY2022 is based on theProvisional FY2022 Settlement, and FY2023 is based on the FY2023 Budget. In "Ordinary
Account of Local Government," FY2021 is based on the Settlement.
2. "Policy Expenditures" is General Account Expenditures excluding interest payments, redemption of the national debt (excluding subsidy bonds) and carry-back of settlement deficit compensation.
3. Debt Repayment in Bond Expenditures excludes subsidy bonds.
4. In "General Account of Central Government," "Other Revenues" in FY2021 and FY2022 consist of non-tax revenues and preceding fiscal year surplus received (around 44.7 trillion yen in FY2021 andaround 32.1 trillion yen in FY2022) excluding the balance of fiscal resources carried forward to the next year (around 22.4 trillion yen in FY2021 and around 18.0 trillion yen in FY2022).
5. In "Ordinary Account of Local Government," "Revenues" excludes local bonds, reduction of reserve, and the balance of fiscal resources carried forward from total revenues. "Tax Revenue" is the totalsum of local taxes and local transfer taxes.

28

【Central and Local Governments' Public Finances】（Including the expenditures and the fiscal resources fo the recovery and reconstruction measures and GX measures）
Economic Growth Achieved Case(%), [ratio to GDP, %], Trillions of Yen

FY2021

FY2022

FY2023

FY2024FY2025

FY2026FY2027

FY2028FY2029FY2030

FY2031

FY2032− 30.4− 28.2− 28.7

− 6.5

− 2.9

0.8

2.8

4.4

6.2

7.9

9.6

11.3

(ratio to nominal GDP)[−5.5][−5.0][−4.9][−1.1][−0.5][ 0.1][ 0.4][ 0.7][ 0.9][ 1.1][ 1.3][ 1.5]

Central Government− 35.6− 31.2− 34.0− 13.1− 11.0

− 8.9

− 7.8

− 6.8

− 6.0

− 5.3

− 4.6

− 3.9

(ratio to nominal GDP)[−6.5][−5.6][−5.8][−2.2][−1.8][−1.4][−1.2][−1.0][−0.9][−0.7][−0.6][−0.5]

Local Government

5.2

2.9

5.3

6.6

8.1

9.7

10.6

11.2

12.2

13.2

14.3

15.2

(ratio to nominal GDP)

[0.9]

[0.5]

[0.9]

[1.1]

[1.3]

[1.5]

[1.6]

[1.7]

[1.7]

[1.8]

[1.9]

[2.0]

− 36.5− 34.1− 34.4− 10.7

− 6.8

− 3.3

− 2.0

− 1.3

− 0.9

− 1.0

− 1.3

− 2.2

(ratio to nominal GDP)[−6.6][−6.1][−5.9][−1.8][−1.1][−0.5][−0.3][−0.2][−0.1][−0.1][−0.2][−0.3]

Central Government− 40.8− 35.9− 38.7− 16.3− 14.0− 12.2− 11.7− 11.8− 12.4− 13.6− 15.0− 16.9(ratio to nominal GDP)[−7.4][−6.4][−6.6][−2.7][−2.3][−1.9][−1.8][−1.7][−1.8][−1.9][−2.0][−2.2]

Local Government

4.3

1.8

4.3

5.6

7.2

8.8

9.7

10.5

11.6

12.6

13.7

14.7

(ratio to nominal GDP)

[0.8]

[0.3]

[0.7]

[0.9]

[1.2]

[1.4]

[1.5]

[1.5]

[1.7]

[1.7]

[1.8]

[1.9]

1174.91206.61242.01252.61262.11270.11277.71285.61295.01306.21319.51335.4(ratio to nominal GDP)

[213.4][214.7][211.8][208.3][204.8][200.0][194.9][189.9][185.2][181.0][177.2][173.8]Central Government

1000.21035.31075.61092.21108.21122.81136.91151.21166.6

1183.31201.71222.2(ratio to nominal GDP)

[181.6][184.3][183.4][181.6][179.8][176.8][173.4][170.0][166.9][164.0][161.4][159.1]

Local Government

174.7

171.3

166.4

160.5

153.9

147.3

140.8

134.4

128.4

122.9

117.8

113.1

(ratio to nominal GDP)

[31.7][30.5][28.4][26.7][25.0][23.2][21.5][19.8][18.4][17.0][15.8][14.7]FY2021

FY2022

FY2023

FY2024FY2025

FY2026FY2027

FY2028FY2029FY2030

FY2031

FY2032− 30.4− 28.2− 28.7

− 6.5

− 4.0

− 1.7

− 1.6

− 1.9

− 2.4

− 2.8

− 3.2

− 3.9

(ratio to nominal GDP)[−5.5][−5.0][−4.9][−1.1][−0.7][−0.3][−0.3][−0.3][−0.4][−0.4][−0.5][−0.6]

Central Government− 35.6− 31.2− 34.0− 13.1− 11.4

− 9.9

− 9.6

− 9.4

− 9.7

− 9.9

− 10.1− 10.6(ratio to nominal GDP)[−6.5][−5.6][−5.8][−2.2][−1.9][−1.6][−1.5][−1.5][−1.5][−1.6][−1.6][−1.7]

Local Government

5.2

2.9

5.3

6.6

7.4

8.2

8.0

7.6

7.3

7.1

6.9

6.7

(ratio to nominal GDP)

[0.9]

[0.5]

[0.9]

[1.1]

[1.2]

[1.3]

[1.3]

[1.2]

[1.2]

[1.1]

[1.1]

[1.1]

− 36.5− 34.1− 34.4− 10.7

− 7.9

− 5.8

− 6.0

− 6.7

− 7.5

− 8.3

− 9.1

− 10.2(ratio to nominal GDP)[−6.6][−6.1][−5.9][−1.8][−1.3][−0.9][−1.0][−1.1][−1.2][−1.3][−1.4][−1.6]

Central Government− 40.8− 35.9− 38.7− 16.3− 14.3− 13.0− 13.2− 13.5− 14.0− 14.6− 15.2− 16.2(ratio to nominal GDP)[−7.4][−6.4][−6.6][−2.7][−2.3][−2.1][−2.1][−2.2][−2.2][−2.3][−2.4][−2.5]

Local Government

4.3

1.8

4.3

5.6

6.5

7.3

7.1

6.7

6.5

6.3

6.2

6.0

(ratio to nominal GDP)

[0.8]

[0.3]

[0.7]

[0.9]

[1.1]

[1.2]

[1.1]

[1.1]

[1.0]

[1.0]

[1.0]

[0.9]

1174.91206.61242.01252.61262.71272.31281.91292.11303.31315.41328.51342.7(ratio to nominal GDP)

[213.4][214.7][211.8][208.3][207.0][206.8][206.8][206.9][207.5][208.2][209.1][210.2]Central Government

1000.21035.31075.61092.21108.81124.61140.31156.41173.11190.51208.61227.7(ratio to nominal GDP)

[181.6][184.3][183.4][181.6][181.8][182.8][183.9][185.2][186.7][188.4][190.2][192.2]

Local Government

174.7

171.3

166.4

160.5

153.8

147.7

141.6

135.8

130.2

124.9

119.8

115.1

(ratio to nominal GDP)

[31.7][30.5][28.4][26.7][25.2][24.0][22.8][21.7][20.7][19.8][18.9][18.0]

Primary Balance

Fiscal Balance

Outstanding Debt

Baseline Case

Primary Balance

Fiscal Balance

Outstanding Debt

29

(Notes)
1. "Consumer Price" refers to the general index (nationwide).
2.

"Per Capita Real GDP Growth" is the change rate of the real GDP divided by the total
population. "Per Employee Wage Growth" is the change rate of the total wages andsalaries divided by the total employees.

3.

"Balance by Sector" represents "Net lending/net borrowing" in the System of National
Accounts (hereinafter "SNA"). Balance by Sector of Households includes NPISHs (nonprofit institutions serving households). Balance by Sector of Corporations includes
statistical discrepancies.

4.

"Fiscal Balance" (hereinafter "FB") of the central and local governments represents"Net lending/net borrowing" in the SNA. "Primary Balance" (hereinafter "PB") equals
FB minus net receivable interest (receivable interest [excluding FISIM] minus payableinterest [excluding FISIM]). The PBs of both the central and local governments include
some special accounts in addition to the general account. Although the debt repayments
and interest payments of the Special Account for the Local Allocation and Local Transfer
Tax (hereinafter SALALTT) are classified as central government in SNA, in accordancewith their contributions, here they are divided into central and local governments.
It should be noted that the PB in the "General Account of Central Government" equals
the sum of "Tax Revenue" and "Other Revenues" minus "General Account Expenditure
Excluding Debt Repayment and Interest Payment." The PB in the "Ordinary Account ofLocal Government" equals "Revenues" minus "Expenditure" excluding "Debt
Repayment and Interest Payment" and "Reserves."

5.

The figures for "Balance by Sector" for the general government and the FB and the
PB of the central and local governments exclude the transfer of debts from the Japan
Expressway Holding and Debt Repayment Agency to the general account in FY2008 andthe payment from the Japan Expressway Holding and Debt Repayment Agency to thegeneral account in FY2011 as one-off factors.

6.

"Outstanding Debt" is the sum of general bonds, local government bonds, andborrowing in SALALTT. The central government’s share of the borrowing allocated to
the general account in FY2007 is included under outstanding debt in order to maintainthe continuity of indices. Borrowing in SALALTT is included in outstanding debt of thelocal government.

7.

The amount of "the expenditures and the fiscal resources for GX measures" refers to
the expenditures eligible for the issuance of "Decarbonized Growth-Oriented Economic
Structure Transition Bonds," which are funded by future financial resources obtained
through carbon pricing, and the fiscal resources for its reimbursement.

8.

The amount of "the expenditures and the fiscal resources for the recovery andreconstruction measures" is the amount of expenditures for recovery and reconstruction
from the Great East Japan Earthquake that exceeds the transfer from the general account,which is compensated for by the reduction of other existing expenditures, and is securely
financed by such fiscal resources as reconstruction bonds, securing further non-tax
revenues, and special taxation for reconstruction, and the amount of the above fiscal
resources.
Based on the "Act on Special Measures Concerning the Handling of Environment30

Pollution by Radioactive Materials Discharged by the NPS Accident Associated with the
Tohoku District – Off the Pacific Ocean Earthquake That Occurred on March 11, 2011"(date of promulgation: August 30, 2011), the expenditure concerning thedecontamination and interim storage facility project that has been reimbursed from
Tokyo Electric Power Company (hereinafter "TEPCO") also includes the expenditures
for the recovery and reconstruction measures, deemed to ensure the corresponding
resources, considering the progress of payment from TEPCO.

31

(Appendix 1) Detailed Assumptions
The future population is based on the National Institute of Population and Social Security
Research’s "Population Projections for Japan" (estimated in 2023) with the births (deaths)
median estimates of total population (including foreigners in Japan). The economic growthrate and inflation rate, etc. are based on the "Annual Report on National Accounts for 2021,"
etc. until FY2021, and the "Quarterly Estimates of GDP for January-March 2023 (Second
Preliminary)," etc. for FY2022, the "Mid-year Economic Projection for 2023 (July 20, 2023,
submitted to the Council on Economic and Fiscal Policy)," etc. for FY2023 and FY2024.
(1) Macroeconomy
Baseline Casea) Total Factor Productivity (TFP) Growth Rate
-The TFP growth rate stays around 0.5%. (Average from Oct-Dec 2012 to Apr-Jun 2020
(16th business cycle)).
b) Labor Force<Labor Force Participation (LFP) Rate>- The LFP rate shifts gradually based on the estimates of labor supply and demand for the"case in which economic growth and labor participation are partly achieved" shown by
the "Labor Policy Study Group" (January 15, 2019) (for example, the LFP rate amongfemales aged 25-44 gradually rises from around 82 % in FY2022 to 90% in FY2032, the
LFP rate among males aged 65-69 gradually rises from around 63% in FY2022 to 66%
in FY 2032, and the LFP rate among females aged 65-69 gradually rises from around
42% in FY2022 to 49% in FY2032).
c）World Economy, etc.
< Real GDP Growth Rate of World Economy (considering the export shares from Japan [10major destination countries])>-The growth rate moves at around 2.9% to 3.1% annually from FY2025 to FY2028, basedon the "World Economic Outlook" (WEO) by the IMF (April 2023). From FY2029
onward, it remains constant, at around 2.9%.
< Inflation Rate (considering the export shares from Japan [10 major destination
countries])>-The inflation rate moves at around 1.9% to 2.0% annually from FY2025 to FY2028, basedon the WEO (April 2023). From FY2029 onward, it remains constant, at around 2.0%.
<Crude Oil Prices>-Based on the assumptions of the Cabinet Office’s "Mid-year Economic Projection for
FY2023," constant from FY2024 onward ($81.3 per barrel).
Economic Growth Achieved Case
Differences from the "Baseline Case" are as follows:a) TFP Growth Rate
-The TFP growth rate reaches around 1.4 %, the average for the period before the Japanese
economy entered the deflationary situation (April-June 1980 to January-March 1999).
32b) Labor Force< Labor Force Participation (LFP) Rate >-The LFP rate shifts gradually based on the estimates of labor supply and demand for the"case in which economic growth and labor participation are achieved" shown by the"Labor Policy Study Group" (January 15, 2019) (for example, the LFP rate amongfemales aged 25-44 gradually rises from around 82% in FY2022 to 91% in FY2032, the
LFP rate among males aged 65-69 gradually rises from around 63% in FY2022 to 70%
in FY2032, and the LFP rate among females aged 65-69 gradually rises from around
42% in FY2022 to 53% in FY2032).
(2) Revenue- Tax revenues of the general account of the central government in FY2021 reflect the"FY2021 Settlement," those in FY2022 reflect the "Provisional FY2022 Settlement" andthose in FY2023 reflect the "FY2023 Budget."- For central and local revenues, the underlying trends based on the "Provisional FY2022
Settlement" and current economic trends are considered.
- Based on the "the Act to Partially Amend the Income Tax Act and Others" (Act Number 3,2023), and other sources, the legislated tax system is assumed to continue.
- Based on the "Act on Special Measures for Securing Fiscal Resources Necessary to
Implement Measures for Reconstruction Following the Great East Japan Earthquake"(Act Number 117, 2011) and the "Act on Temporary Special Provision on Local Tax toSecure Necessary Fiscal Resources for Local Governments to Implement Policies for
Disaster Prevention Related to Recovery from the Great East Japan Earthquake" (Act
Number 118, 2011), the projections reflect the implementation of the special tax forreconstruction and the rise in the individual inhabitant tax on a per capita basis. The tax
rate cut in the special income tax for reconstruction and the extension of its taxable
period along with securing fiscal resources for the implementation of defense capability
buildup are not assumed, as its implementation period etc. are not decided.
(3) Expenditures- The expenditures of the general account of the central government in FY2021 reflect the"FY2021 Settlement," those in FY2022 reflect the "Provisional FY2022 Settlement," andthose in FY2023 reflect the "FY2023 Budget."- The expenditures for FY2024, taking into account trends in prices and wages, and theexpenditure reform effort thus far, and excluding factors such as the population aging
consequently, are calculated mechanically with a reduction in expenditure growth byabout half of the amount that the expenditure reform effort could curve if it is continued.
- From FY2025, social security expenditures increase, reflecting the population aging andprice and wage developments, and other expenditures (excluding the expenditures
explained below in the specific period for the defense capability buildup and the national
resilience) increase along with the inflation rate (constant in real terms).
- The additional expenditures of two trillion yen are assumed in FY2024 and FY2025
respectively, based on "Five-Year Acceleration Measures for Disaster Risk Reduction,
and National Resilience" and the implementation progress of its budgets in the past.
- Social security expenditures reflects the "Act to Partially Amend the National Pension
Act and Others to Enhance National Pension System" (Act Number 40, 2020), and the"Act to Partially Amend the Health Insurance Act and Others to Build Social Security
System Oriented to All Generations" (Act Number 66, 2021), the "Act Partially
Amending the Health Insurance Act and Other Act in Order to Establish a Sustainable
Social Security System That Covers to All Generations" (Act Number 31, 2023).
33

- The series of social security-related expenditures is endogenously obtained within the"Economic and Fiscal Model" based on future demographics and macroeconomic
dynamics. Considerable leeway should be given when interpreting the projections since
the series is significantly affected by policies and other external factors.
- The additional expenses and financial resources for the measures to counter declining
birthrates based on the "Children's Future Strategic Policy" (Cabinet Decision, June 13,2023) are not incorporated in this projection, as the specific details and scale of thesemeasures are expected to become clear during the future budget compilation process.
(4) Assumptions on the Expenditures and Financial Resources for the Implementation of
Defense Capability Buildup- Based on the "Defense Buildup Program" (Cabinet Decision, December 16, 2022) etc.,
the assumptions are as follows:- The total expenditures for the necessary level of defense capability buildup for five years
from FY2023 to FY2027 amount to around 43 trillion yen. The expenditures in FY2023
reflect around 6.6 trillion yen of the FY2023 Budget, those in FY2027 are around 8.9
trillion yen based on the program, and those from FY2024 to FY2026 are allocatedaround 8.9 trillion yen in each year. The rest of those is added to the expenditures in
FY2023 (only in the "Central and Local Governments’ Public Finances"). From FY2028
onward, the expenditures increase along with the inflation rate, in line with other general
expenditures.
- For financial resources related to the program, the necessary measures will be taken to
secure financial resources for the additional expenditures of the annual defense budgets
for five years from FY2023 to FY 2027 (around 40.5 trillion yen in total). The measures
include reform of expenditures, utilization of settlement surplus, creation of defense
capability reinforcement funds utilizing non-tax revenue, and tax measures (not all of
the non-tax revenue, including the new funds, in the FY2023 Budget are included in thecalculation of the primary balance of central and local governments). The FY2023
Budget is reflected and the rest of the financial resources is allocated from FY2024 toFY2027, so that the financial resources for each year are linked to the additional
expenditures of the annual defense budgets. All of the financial resources are added to
the Other Revenues In the General Account of the central government without assuming
any breakdown (in the "Central and Local Governments’ Public Finance," the ratio of
the financial resources which are not included in the calculation of the primary balanceis taken into consideration). The financial resources are counted as those for the year inwhich they are generated, based on the rule of the SNA. From FY2028 onward, thenecessary measures will be assumed to be taken, as in FY2027.
(5) Assumptions on the Expenditures and Financial Resources for the Implementation of GX- Based on the "Basic Policy for Realization of GX" (Cabinet Decision, February 10, 2023)
and the "Law on Promotion of Smooth Transition to a Decarbonized Growth-Oriented
Economic Structure" (Law No. 32, 2023), the assumptions are as follows:- The total expenditures of around 20 trillion yen will be budgeted in the Special Accountfor energy measure for the 10 years from FY2023 to FY2032. As for the allocation toeach year, the expenditures excluding 1.6 trillion yen of FY2022 and FY2023 are equally
allocated to each of remaining years.
- The expenditure that amounts to around 20 trillion yen is assumed to be financed byissuing "Decarbonized Growth-Oriented Economic Structure Transition Bonds" fundedby future financial resources through carbon pricing. While the Basic Policy includes
the introduction of the fossil fuel surcharge as carbon pricing in FY2018, this projection
does not incorporate the scheme since its specific volume is yet to be clear.
34

- The "Decarbonized Growth-Oriented Economic Structure Transition Bonds" are to beredeemed by FY2050 with the future financial resources secured from carbon pricing.
Since this framework is designed to be balanced by expenditures and financial resources
neutrally on a multi-year basis, the figures in the "Central and Local Governments'
Public Finances" exclude the expenditures and the fiscal resources for GX measures(specifically, the figures exclude the expenditures and the fiscal resources for bothrecovery and reconstruction measures and GX measures; the figures including theamount of these expenditures and financial resources are also shown separately).
(6) Assumptions on the Expenditures and Financial Resources for Recovery andReconstruction from the Great East Japan Earthquake- Expenditures are assumed at around 31.3 trillion yen until FY2020 and around 1.6 trillion
yen in five years from FY2021, based on the "Recovery and Reconstruction Work for
the Five-Year Period Starting in FY2016" (Reconstruction Promotion Conference
Decision, June 24, 2015), the "Scale and Funding Sources for Recovery andReconstruction Work during the Reconstruction including the Five-Year Period Startingin FY2016" (Cabinet Decision, June 30, 2015), the "Reconstruction Efforts fromFY2021" (Decision by the Reconstruction Promotion Council, July 17, 2020) and others.
- In the projections, it is assumed that around 32.9 trillion yen of revenue resources will
be secured by the special tax for reconstruction, a reduction of expenditures, non-tax
revenues and others based on the "Basic Guidelines for the Third Supplementary Budget
in FY2011 and the Fiscal Resources for Reconstruction" (Cabinet decision, October 7,2011), the "Scale and Funding Sources for Recovery and Reconstruction Work from NowOn" (Reconstruction Promotion Conference Decision, January 29, 2013), the "Recovery
and Reconstruction Work for the Five-Year Period Starting in FY2016" (Reconstruction
Promotion Conference Decision, June 24, 2015), the "Scale and Funding Sources for
Recovery and Reconstruction Work during the Reconstruction including the Five-Year
Period Starting in FY2016" (Cabinet Decision, June 30, 2015), the "Reconstruction
Efforts from FY2021" (Decision by Reconstruction Promotion Council, July 17, 2020)and others. The tax rate cut in the special income tax for reconstruction and the extensionof its taxable period along with securing fiscal resources for the implementation of
defense capability buildup are not assumed, as its implementation period etc. are notdecided.
- The expenditure concerning the decontamination and interim storage project facility
which will be reimbursed from TEPCO and the actual payment corresponding to it are
assumed to be approximately 5.8 trillion yen in total, based on the "Basic Guideline forAccelerating the Reconstruction of Fukushima from the Nuclear Disaster" (Cabinet
Decision, December 20, 2016), and the pattern of expenditure and revenue is assumed
based on the progress of implementation and payment to date.

35

(Appendix 2) Comparison with the Previous Projection

4

Potential Growth Rate(%)

Projection

3

1.9

0.9

2

1.7

1

0.4

0

0.3

-1
Baseline Case (Jan.)-2

Economic Growth Achieved Case (Jan.)-3

Baseline Case (July)-4

Economic Growth Achieved Case (July)

-5

4

2019

20

21

22

23

24

25

26

27

28

29

30

31

32
(FY)

Real GDP Growth Rate(%)

3

Mid-yearEconomic
Projection
for FY2023

1.4

2

Projection

1.9

1.7
0.4

1
0
-1

Baseline Case (Jan.)-2

Economic Growth Achieved Case (Jan.)-3

Baseline Case (July)-4-5

Economic Growth Achieved Case (July)

2019

20

21

22

23

24

25

26

36

27

28

29

30

31

32
(FY)

(%)

Primary balance of Central and Local Governmnet Combined(Ratio to Nominal GDP)

2

Projection

0
-2

0.4

-0.2

-0.4

-2.6

-4

-0.4

-5.5

Baseline Case (Jan.)-6

Economic Growth Achieved Case (Jan.)
Baseline Case (July)

-8
-10

230

1.7

Economic Growth Achieved Case (July)

-9.1
2019

21

20

22

23

24

25

26

27

28

29

30

31

32
(FY)

Outstanding debt (Ratio to Nominal GDP)

(%)

213.5

220

212.3

210

206.6

206.9

200

204.3

Projection

190

Baseline Case (Jan.)180

Economic Growth Achieved Case (Jan.)
Baseline Case (July)

170
160

170.7

Economic Growth Achieved Case (July)

2019

20

21

22

23

24

25

37

26

27

28

29

30

31

32
(FY)

(Appendix 3) Comparison with private sector forecasts
Below is the comparison of this projection with the average of domestic economists'
forecasts. As for real GDP growth after FY2025, the Baseline Case is about the same as theaverage, while the Economic Growth Achieved Case is higher than the higher average.
As for the consumer price inflation rate after FY2025, the Baseline Case is the same as thelower average, while the Economic Growth Achieved Case is the same as the higher average.

Real GDP Growth rate

Cabinet office"Medium to Long Term Analysis"※until 2032

Privete Sector Forcasts(ESP Forecast)（FY, app.%）

2023

24

25-29
average30-34
average

Baseline Case

1.3

1.2

0.7

0.5

Economic Growth
Achieved Case

1.3

1.2

1.7

1.8

Lower Average

0.8

0.7

0.5

0.2

Average

1.2

1.1

0.8

0.6

Higher Average

1.5

1.4

1.2

1.0

Change of Consumer Price

Cabinet office"Medium to Long Term Analysis"※until 2032

Privete Sector Forcasts(ESP Forecast)（FY,app.%）

2023

24

25-29
average30-34
average

Baseline Case

2.6

1.9

0.8

0.7

Economic Growth
Achieved Case

2.6

1.9

2.0

2.0

Lower Average

2.3

1.0

0.7

0.5

Average

2.6

1.7

1.3

1.3

Higher Average

2.9

2.3

2.0

2.0

(Notes) FY2023 and FY2024 private-sector forecasts are based on the Japan Center for Economic Research's "ESP Forecast Survey"(July 2023); FY2025-29 and FY2030-34 are based on long-term forecasts from the same survey (June 2023). Lower andhigher averages are averages of the lowest 8 forecasters and those of the highest 8 forecasters of about 40 forecasters,
respectively. Consumer Price of ESP Forecast Survey is a composite series excluding fresh food.

38

(Appendix 4) References
Aiyar, Shekhar, Ilyina, Anna and others (2023), "Geoeconomic Fragmentation and the Future ofMultilateralism," IMF Staff Discussion Notes SDN/2023/001.
CBO (2023), The Budget and Economic Outlook: 2023 to 2033.
IMF (2014), Government Finance Statistics Manual 2014.
――― (2020), "Mitigating Climate Change ― Growth- and Distribution-Friendly Strategies," Chapter3, inWorld Economic Outlook, October 2020: A Long and Difficult Ascent.
――― (2023a), World Economic Outlook, April 2023: A Rocky Recovery.
――― (2023b), Article IV Consultation with Japan; Staff Reports.
OECD(2021), OECD Economic Surveys: Japan 2021, OECD Publishing.
Steel, Daniel (2021), "Evaluating forecast uncertainty with stochastic simulations," OBR Working paper No.
17.
World Bank (2023), Commodity Markets Outlook.
Kim, Yeong-Kyung, Fukao, Kyong-Ji, Gong, Hee-Kyu, and Kenta Ikeuchi, (2023), "Resource reallocation
among firms under a new coronavirus epidemic: productivity dynamics analysis using firm micro data,"
RIETI Discussion Paper Series 23-J-016, Research Institute of Economy, Trade and Industry (RIETI).
Cabinet Office (2022), Annual Economic and Fiscal Report 2022.
Director General for Economic Research, Cabinet Office (2005),The Japanese Economy 2005.
Director General for Economic Research , Cabinet Office (2023), Global Economic Trends 2022 II.
Morikawa, M. (2015), "On the Quantitative Effects of Economic Growth Policies: An Overview Based on
Existing Studies," RIETI Policy Discussion Paper Series 15-P-001, Research Institute of Economy,
Trade and Industry.
――― (2018a), Productivity: misconceptions and truths, Nihon Keizai Shimbun Publishing.
――― (2018b), "Firms' Investment in Education / Training and Productivity," RIETI Discussion Paper Series
18-J-021, Research Institute of Economy, Trade and Industry.

39