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Policy Research Institute

Table of Contents

Vol. 134 : Quantitative Analysis of Japan's Public Finance and Economy

Macro-model analysis of Japan’s economic and fiscal conditions:
Analysis by the Office of Econometric Analysis for Fiscal and Economic Policy, Policy Research Institute, Ministry of Finance
 (Takahide Koike, Katsuyuki Hasegawa, Takeshi Kogawa, Daisuke Ishikawa, Daizo Kojima)

Japan’s Long-Term Care Cost Projections:
Comparison with the European Commission Ageing Report
 (Seika Akemura, Daizo Kojima)

What Causes Errors in Projections of Medical and Long-term Care Expenses? (Yuki Demizu, Daizo Kojima, Takahide Koike)

The Effects of Capital Taxation Using Dynamic Macro-Econometric Model of the Japanese Economy
―Simulation Analysis Including Households without Financial Assets―
 (Daisuke Ishikawa, Dun-Yen Wang, Masahiko Nakazawa)

Policy Simulation of Government Expenditure and Taxation Based on the DSGE Model  (Go Kotera, Saisuke Sakai)

Accuracy and speed of the solution methods for sovereign default models:
The stable performance of the Tauchen method and cubic spline interpolation
 (Takefumi Yamazaki)

Japan’s Inequality and Redistribution:
The Perspectives of Human Capital and Taxation/Social Insurance
 (Masakazu Kumakura, Daizo Kojima)

The Saving Behavior of Elderly People in Japan:
Analysis Based on Micro-Data from the National Survey of Family Income and Expenditure
 (Masahiko Nakazawa, Kazuaki Kikuta, Yasutaka Yoneta)

Estimation of Inheritance Taxation Using Micro Data from the National Survey of Family Income and Expenditure (Shun Hioki)

The Discrepancy Between the Household Saving Rates Micro and Macro Statistics:
An Adjustment Method
 (Takashi Unayama, Yasutaka Yoneta)

Decomposition Approach on Changes in Redistributive Effects of Taxes and Social Insurance Premiums (Taro Ohno, Takahiro Kodama, Ryutaro Matsumoto)


Summary of Articles

Macro-model analysis of Japan’s economic and fiscal conditions :
Analysis by the Office of Econometric Analysis for Fiscal and Economic Policy, Policy Research Institute, Ministry of Finance

Author
By Takahide Koike(Former Senior Economist, Policy Research Institute, Ministry of Finance)
By Katsuyuki Hasegawa(Former Economist, Policy Research Institute, Ministry of Finance)
By Takeshi Kogawa(Former officer, Government Financial Institutions Division, Minister’s Secretariat, Ministry of Finance)
By Daisuke Ishikawa(Former Senior Economist, Policy Research Institute, Ministry of Finance)
By Daizo Kojima(Associate Professor, Institute of Economic Research, Kyoto University)

(Abstract)

The Office of Econometric Analysis for Fiscal and Economic Policy, Policy Research Institute, Ministry of Finance has three backwards-looking macro-econometric models.

The first is a general equilibrium model. This is an IS-LM Phillip’s curve model, and its main demand factors are based on Error Correction Models (ECM). Each demand factor has a mechanism of gradual convergence to long-term equilibrium. As such, the model is suited to projecting mid- to long-term economic and fiscal paths.

The second model is a partial equilibrium model. This model takes various (socio) economic variables—such as GDP, interest rates, and population in the future—as exogenous, and then base these exogenous variables to gain fiscal paths. The model is suited to examining long-term fiscal conditions and fiscal sustainability.

The third model is NiGEM, developed by NIESR. NiGEM is similar to the general equilibrium model in that it is centered on ECMs, while the structure for the fiscal sector is simpler than the general equilibrium model. On the other hand, NiGEM is a multi-national model involving 44 countries, including Japan, so it has an advantage of analyzing the effects of economic shocks from overseas, as well as the mutual relationships between Japanese economy and the economies in other countries.

In this paper, we make use of the characteristics of these three models and present results for each of the following cases: (1) the mid- to long-term forecast of Japanese economy using the general equilibrium model; (2) Japanese fiscal sustainability using the partial equilibrium model; (3) the effects upon Japanese economy by overseas shocks using NiGEM.


Keywords: Macroeconometric models; Economic forecasting; Fiscal sustainability
JEL Classification: E17, F17, H16

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Japan’s Long-Term Care Cost Projections:
Comparison with the European Commission Ageing Report

Author
By Seika Akemura(Visiting Scholar, Policy Research Institute, Ministry of Finance)
By Diazo Kojima(Associate Professor, Institute of Economic Research, Kyoto University)

(Abstract)

Japan’s long-term care costs are increasing at a higher rate than other social security-related costs. Therefore, it is important to examine the exacerbating and constraining factors on future long-term care costs using various scenario hypotheses. This study establishes four scenarios based on the European Commission’s Ageing Report (2015)―the base case, high life expectancy, constant disability, and shift to formal care scenarios―to project Japan’s long-term care costs until 2060 and also examines the factors affecting future long-term care costs. Moreover, the projection results for Japan and various EU countries for the four selected scenarios are compared in order to examine the particular characteristics of Japan’s long-term care costs. The projection results show that Japan’s long-term care costs for the period 2013-2060 rise significantly in each scenario, while individual comparisons show that both the high life expectancy and shift to formal care scenarios rise further than in the base case scenario, while long-term costs decrease in the constant disability scenario. Furthermore,the comparison of the projection results for Japan and the EU countries by scenario show that Japan, which is significantly affected by aging, has a greater scale of increase in the high life expectancy scenario and a greater scale of constraint in the constant disability scenario.


Keywords: long-term care, population aging, projections
JEL Classification: C53, E27, H50

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What Causes Errors in Projections of Medical and Long-term Care Expenses?

Author
By Yuki Demizu(Researcher, Policy Research Institute, Ministry of Finance)
By Daizo Kojima(Associate Professor, Institute of Economic Research, Kyoto University)
By Takahide Koike(Former Senior Economist, Policy Research Institute, Ministry of Finance)

(Abstract)

While medical and long-term care costs in Japan are expected to continue to rise in the future, it is not clear to what degree we can estimate this increase using current projecting methods. Therefore, in this study, we hypothetically estimate medical and long-term care expenses based on past data, quantitatively analyzing discrepancies from actual results and the primary factors contributing to increases over time. In estimating medical and long-term care expense, we use a projection method that multiplies the recipient population by the cost per capita. In addition, it is assumed that medical expenses per capita rise at the same rate as nominal GDP per capita and long-term care expenses change at the same rate as nominal wages per capita. Then, projection errors are broken down into “recipient population factors” and “per capita cost factors.” The results of our analysis indicate that, while increases in expenses due to changing population structure make up a large proportion of increases in total medical and long-term care expense, most of these costs are projectable and thus, the projection error is not large. On the other hand, for per capita expenditure, there is a divergence between estimates of growth based on economic indicators and actual results, which is a factor causing underestimates. Of these increases in medical expenses and long-term care expenses during the analysis period, the proportion of error due to this per capita cost was 26% for medical expenses and 28% for long-term care expenses.


Keywords: Medical expenses, Long-term care expenses, Projection errors, Factor analysis
JEL Classification: I13, I15

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The Effects of Capital Taxation Using Dynamic Macro-Econometric Model of the Japanese Economy
―Simulation Analysis Including Households without Financial Assets―

Author
By Daisuke Isikawa(Former Senior Economist, Policy Research Institute, Ministry of Finance)
By Dun-Yen Wang(Researcher at the Research Center for Advanced Policy Studies, Institute of Economic Research, Kyoto University)
By Masahiko Nakazawa(Visiting Scholar, Policy Research Institute, Ministry of Finance)

(Abstract)

In order to maximize social welfare, it is important to ensure stable economic growth by revitalizing private-sector. From this viewpoint, it is necessary to design capital taxation such that it avoids undue distortions in the corporate sector as much as possible. On the other hand, as the government’s fiscal situation is deteriorating, reform on tax system must also be consistent with fiscal sustainability. With these perspectives in mind, we developed a dynamic macro-econometric model (dynamic CGE model) that contributes to the analysis of capital taxation, in reference to Radulescu (2007) and Radulescu and Stimmelmayr (2010), while including households without financial assets. In this paper, we report the results of various numerical simulation analyses, maintaining neutrality of tax revenues.


Keywords: dynamic macro-econometric model, capital taxation, liquidity-constrained consumers, tax revenue neutrality
JEL Classification: C54, H21, H25

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Policy Simulation of Government Expenditure and Taxation Based on the DSGE Model

Author
By Go Kotera(Former Economist, Policy Research Institute, Ministry of Finance)
By Saisuke Sakai(Former Visiting Scholar, Policy Research Institute, Ministry of Finance)

(Abstract)

This study constructs a dynamic stochastic general equilibrium (DSGE) model including four types of government expenditure (merit goods, public goods, government investment, and lump-sum income transfers) and three types of tax (consumption tax, labor income tax, and capital income tax), and estimate the model parameters. We then perform a simulation analysis based on the estimation results. The estimates, using Japanese data from the first quarter of 1981 to the fourth quarter of 2012, suggest that Japanese government expenditure and effective tax rates do not significantly respond to changes in the output gap and cumulative debt. Furthermore, from a simulation analysis based on the estimation results, we draw two main findings. First, as to the differences in taxes used for financing government expenditure, while consumption tax and labor income tax are almost indifferent, capital income tax aggravates the economy in the long term. Second, when using the increased tax revenue derived from raising the consumption tax rate for additional government expenditure, expenditure on merit goods and government investment have positive effects on the economy in the short and long term, respectively.


Keywords: DSGE model, Bayesian estimation, fiscal policy, simulation analysis
JEL Classification: C11, D58, E32, E62

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Accuracy and speed of the solution methods for sovereign default models:
The stable performance of the Tauchen method and cubic spline interpolation

Author
By Takefumi Yamazaki(Senior Economist, Policy Research Institute, Ministry of Finance)

(Abstract)

We examine the solution methods of sovereign default models in accuracy and speed when using the Tauchen and the Rouwenhorst methods for discretizing AR (1) endowment processes, and linear, quadratic and cubic spline interpolation for approximating the value functions. Our results show that (i) the Tauchen method obtains stable solutions in all the cases, (ii) using interpolation methods for approximating value functions improves both accuracy and speed as with previous studies, and (iii) cubic spline interpolation delivers accurate and stable performance regardless of types of default cost and the degree of persistence unlike linear and quadratic splines


Keyword: Sovereign default, Numerical calculation, Full-nonlinear DSGE
JEL Classification: F34, F41

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Japan’s Inequality and Redistribution:
The Perspectives of Human Capital and Taxation/Social Insurance

Author
By Masakazu Kumakura(Senior Economist, Policy Research Institute, Ministry of Finance)
By Diazo Kojima(Associate Professor, Institute of Economic Research, Kyoto University)

(Abstract)

Inequality and redistribution have been widely discussed internationally and they are an important policy agenda in Japan as well. In this paper, we delve into the history of the academic debate on inequality and redistribution from the perspective of human capital, and draw policy implications for Japan. Further, we examine the current state of inequality and redistribution from the point of view of both household income and expenses, and taking account of the implications from the academic discussion, present several points for future discussion.

The traditional academic argument posits that there is a trade-off relationship between income redistribution and economic development. However, more recently, scholar have argued that redistribution and economic growth are compatible and mutually complementary; inequality could negatively impact economic development, or income redistribution could positively impact economic development. Particular attention has been paid to the importance of a redistribution policy that promotes human capital development.

In terms of inequality and redistribution in Japan, the majority of benefits provided to households are directed towards senior citizens and less towards human capital accumulation. Further, low-income households spend less on education, both in relative and absolute terms, and the education expenses of households with householders who do not have fulltime employment are even lower. Examining household expenditure, we find that the impact of redistribution among income groups is diminished by wage deduction, regressive social insurance premiums, and taxation of financial income.

From the point of view of household income, it is important to consider redistribution methods that—in line with implications from the related academic discussion—promote human capital accumulation. From the point of view of household expenses, a taxation/social insurance premium regime should promote effective redistribution.


Keywords: inequality, redistribution, human capital accumulation, taxation, social insurance premiums
JEL Classification: O15, H23, H24

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The Saving Behavior of Elderly People in Japan :
Analysis Based on Micro-Data from the National Survey of Family Income and Expenditure

Author
By Masahiko Nakazawa(Visiting Scholar, Policy Research Institute, Ministry of Finance)
By Kazuaki Kikuta(Former Visiting Scholar, Policy Research Institute, Ministry of Finance)
By Yasutaka Yoneta(Ph.D. candidate, Hitotsubashi University; Visiting Scholar, Policy Research Institute, Ministry of Finance)

(Abstract)

This paper examines elderly people’s saving behavior by conducting a bias-adjusted analysis concerning the amounts of their savings and asset liquidations using micro data obtained through the National Survey of Family Income and Expenditure in consideration of the results of past studies. The main findings of this paper are that: (1) among elderly households,households of married couples and one-person households (hereinafter referred to as“independent elderly households”) usually build up savings when working and liquidate assets when not working; (2) in the case of non-working households, the asset liquidation amount per month is 14,400 yen, markedly smaller than the figure of 97,500 yen indicated in the National Survey of Family Income and Expenditure; (3) households comprised of elderly people and their children (hereinafter referred to as “extended households”) generally build up savings regardless of whether they work; (4) among independent elderly households,there is a tendency that the proportion of households that build up savings (savingsrate) is higher in higher income, asset and age brackets; and (5) when independent elderly households are classified by the existence or non-existence of children, the savings rate is higher among those which have children than among those which do not.


Keywords: National Survey of Family Income and Expenditure, micro data, savings, life cycle hypothesis, elderly households
JEL Classification: D12, D31, D91

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Estimation of Inheritance Taxation Using Micro Data from the National Survey of Family Income and Expenditure

Author
By Shun Hioki(Former Researcher, Policy Research Institute, Ministry of Finance)

(Abstract)

In this paper, we estimated the inheritance taxation rate in 2010 and 2015 using raw data from the National Survey of Family Income and Expenditure. From the National Tax Agency Annual Statistics Report, which is a source of direct tax information, only data concerning the results of overall taxation on households subject to the inheritance tax is available, so it is difficult to conduct a detailed analysis based on this report. However, we succeeded in conducting estimation and analysis by developing a simulation model using an abundance of micro data, including data concerning households other than those subject to the inheritance tax.

Our model is intended to contribute to policymaking by estimating the inheritance taxation rates through the use of the National Survey of Family Income and Expenditure and the Vital Statistics and analyzing the impact of tax system revisions.

The estimated rates, including on a declared basis, are close to the actual taxation rates in each of 2010 and 2015, and we also succeeded in more accurately estimating the impact of the 2013 tax system revision than the government’s official estimates.

Our analysis makes it clear that the impact of proportional deduction determined by the number of legal heirs on the taxation rate has grown since the revision. It also suggests tha although the reduction of the standard deduction amount has had a significant impact on the taxation rate, the revision of the real estate assessment system may have had a greater impact on tax revenue.

As accumulated capital is attracting interest as a factor behind economic inequality, it is very meaningful to analyze the inheritance tax system, which is a representative asset taxation system.

This paper provides some implications for the analysis of the inheritance tax system in Japan.


Keywords: inheritance tax, wealth redistribution, inequality, households
JEL classification: H2, D14

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The Discrepancy Between the Household Saving Rates in Micro and Macro Statistics: An Adjustment Method

Author
By Takashi Unayama(Associate professor, Hitotsubashi University; Senior Research Fellow, Policy Research Institute, Ministry of Finance)
By Yasutaka Yoneta(Ph.D. candidate, Hitotsubashi University; Visiting Scholar, Policy Research Institute, Ministry of Finance)

(Abstract)

The household saving rates in the “System of National Accounts (SNA)” and the “Family Income and Expenditure Survey (FIES)”, which were at the nearly same level in 1980, has deviated significantly after that. In 2015, the difference range was 25.9%. In this paper, we have identified the reasons for the discrepancies between the two statistics. The average difference over the period from 1994 to 2015 is 21.3 percentage point, and 93.2% of them can be explained with the identified factors: (1) differences in coverages of each survey; (2) differences in the concept of income and consumption; and (3) non-sampling errors in the FIES. While it has been known that these factors can explain most of the differences, our results confirm that the discussions are still valid with the 2008 SNA, which was newly introduced in Japan.


Key words: household saving, Family Income and Expenditure Survey, System of National Accounts
JEL Classification D14, E21, P51

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Decomposition Approach on Changes in Redistributive Effects of Taxes and Social Insurance Premiums

Author
By Taro Ohno(Associate Professor, Shinshu University)
By Takahiro Kodama(Former Researcher, Policy Research Institute, Ministry of Finance)
By Ryutaro Matsumoto(Researcher, Policy Research Institute, Ministry of Finance)

(Abstract)

In this paper, we examine the redistributive effects of taxes and social insurance premiums in Japan. The change in redistributive effects over time includes not only a contribution of changes in the tax and social insurance systems (“reform effect”), but also a contribution of changes in income distribution or demographics (“non-reform effect”). Therefore, we attempt to capture the true contribution of the reform effect. For achieving this purpose, we use household micro data from the National Survey of Family Income and Expenditure (NSFIE) in 1989-2014 by the Ministry of Internal Affairs and Communications, and estimate the tax and social insurance burdens on households by applying information, such as family unit, income, etc., reported in the questionnaire to the actual system. And, we decompose the redistributive effect into the “reform effect” and the “non-reform effect”, and examine the contributions of each effect.

We show that the taxes and social insurance premiums mitigated the widening of income disparity, but the “reform effect” didn’t have a contribution to the change in the redistribution effect. Although it is increasingly important to fund the social security cost, it is required to consider the future of taxes and social insurance premiums, taking into account the enhancement of the redistributive effects of them.


Keywords: tax, social insurance premium, redistributive effect, decomposition
JEL Classification: C15, H24

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