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An Attractive Japan

(Reference)

The Macroeconomic Framework Until 2020


Table 1. Growth Potential of the Japanese Economy

(%)
1981-9396-2010
2011-20
96-20002001-0506-2010
Growth potential 3.23.03.13.02.92.6

Capital stock components 1.41.41.41.51.51.3

Private sector 1.31.31.21.31.31.2
Public sector 0.10.10.20.20.10.1
Labor force component 0.3-0.10.2-0.1-0.3-0.4
Innovation component 1.51.61.51.61.61.7
Note:
Because of rounding, the totals may not exactly equal the sum of the components involved. Population data were drawn from the middle-variant projections of the Health and Welfare Ministry's Institute of Population Problems.
Annual working hours were presumed to be about 1,850 in 2010 and 1,800 in 2020.
All data are for fiscal years (April to March).

Reference: International Comparison of Gross Domestic Product

($ trillion)
199420102020
Japan4.397.2111.18
United States6.139.3912.26
European Union7.0210.7514.03
Ten Asian countries #1.955.9111.22
#. China, Hong Kong, India, Indonesia, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand.

Note:
Based on 1990 prices and a yen-dollar rate of 90 yen in 2010 and 80 yen in 2020.
Annual average growth in the United States and the European Union was set at 2.7%.
For the Asian countries other than Japan, growth rates were set at 6.5% for 1994-2010 and 5.7% for 2010-20 (drawing on a forecast by the Sakura Institute of Research), and exchange rates were assumed to appreciate against the dollar at the same rate as the yen.

Table 2. Mechanical Estimates of Japan's General Account Indices with Varying Consumption Tax Rates

Case 1

Fiscal year19962000200520102020
Reliance on government
bonds (%)
28.029.727.521.619.3
Ratio of debt-servicing costs
to general expenditures (%)
21.824.527.027.927.5
Outstanding government
bonds (trillion yen)
241318431542812
Ratio of outstanding
bonds to GDP (%)
48.654.761.163.170.3
Rough ratio of direct
taxes to total taxes (%)
7065656565

Case 2

Fiscal year19962000200520102020
Reliance on government
bonds (%)
28.025.021.213.48.7
Ratio of debt-servicing costs
to general expenditures (%)
21.824.225.525.122.8
Outstanding government
bonds (trillion yen)
241314402471610
Ratio of outstanding
bonds to GDP (%)
48.654.157.054.952.9
Rough ratio of direct
taxes to total taxes (%)
7062606060

Case 3

Fiscal year19962000200520102020
Reliance on government
bonds (%)
28.025.013.83.10
Ratio of debt-servicing costs
to general expenditures (%)
21.824.224.922.717.2
Outstanding government
bonds (trillion yen)
241314395416391
Ratio of outstanding
bonds to GDP (%)
48.654.156.048.533.9
Rough ratio of direct
taxes to total taxes (%)
7062545353

Case 4

Fiscal year19962000200520102020
Reliance on government
bonds (%)
28.025.09.100
Ratio of debt-servicing costs
to general expenditures (%)
21.824.224.621.113.2
Outstanding government
bonds (trillion yen)
241314390380245
Ratio of outstanding
bonds to GDP (%)
48.654.155.344.221.2
Rough ratio of direct
taxes to total taxes (%)
7062504949

Suppositions:

  1. Case 1 presumes a one-time hike in the consumption tax from the current 3% rate to 5% in 1997. Case 2 presumes two hikes to 5% (1997) and 7% (2000). Case 3 uses three hikes to 5% (1997), 7% (2000), and 10% (2005). Case 4 also uses three hikes but lifts the 2005 rate to 12%.
  2. Recurring expenditures (for such items as personnel costs, office costs, and social security benefits) rise at annual average rates of 1% for 1997-99, 2% for 2000-2010, and 3% for 2011-20. (On an initial budget basis, these expenditures rose by 2.4% in 1993, 1.7% in 1994, and 2.6% in 1995; in the proposed budget for 1996, the increase is 1.5%.) Investment expenditures rise at a 6% pace over the 1997-2000 period and at a 2% pace thereafter. (In the proposed budget for 1996, the increase is 5.2%.)
  3. Two cuts in income taxes, each amounting to 3 trillion yen, are implemented in 2000 and 2005; two cuts in corporate taxes, each amounting to 2 trillion yen, are implemented in 1997 and 2000. (To bring effective tax rates down to the U.S. level, a separate cut in local corporate taxes would also be needed.)
  4. The elasticity of income and corporate taxes to GDP is 1.1 until 2010 and 1.0 thereafter; the elasticity of the consumption tax to GDP is 1.2 until 2010 and 1.0 thereafter.
  5. Nominal GDP grows annually by 4% over the 1996-2010 period and by 3% over the 2010-20 period.

Table 3. Estimates of the National Tax and Welfare Burden

(%)
Fiscal year199420102020
Welfare burden15.021.524.3
Tax burdenCase 321.023.923.9
Case 421.025.025.0
Total burdenCase 336.045.448.2
Case 436.046.549.3
Note:
Ratios of social security contributions and tax payments to national income.
The welfare burden was calculated using the methodology developed for Keidanren's April 23, 1991, proposal on rebuilding the welfare system for Japan's graying society.
Population data were drawn from the middle-variant projections of the Health and Welfare Ministry's Institute of Population Problems.


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