School of Economics

2018 Discussion papers

School of Economics Discussion Paper 18/09

Population Aging, Government Policy and
the Postwar Japanese Economy

Keisuke Otsu, Keio University and University of Kent
Katsuyuki Shibayama, University of Kent

July 2018


This paper analyzes the Postwar Japanese economy with a parsimonious neoclassical growth model that incorporates the demographic transition in Japan. We find that i) the increase in the aged-population share can account for most of the decline in employment and reduced output by 8% from its potential level, ii) workweek shortening policy led to a 20% reduction in output from its potential level by reducing hours worked over the 1988-1992 period, iii) labor income tax led to an 11% reduction in output from its potential level by discouraging hours worked, iv) the shift in the composition of government spending may have caused a slowdown in productivity growth and hence a reduction in the potential output level itself.

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Last Updated: 31/07/2018