In light of Japan’s ageing population, should the government place greater emphasis on tackling deflation or on cutting its fiscal deficit?
Both Singapore and Japan are facing significant challenges due to their ageing populations. In Singapore, the growing elderly demographic is placing a burden on social services such as eldercare and pension schemes, while healthcare costs and the demand for geriatric services continue to rise. Likewise, Japan is experiencing strain on its healthcare system and pension resources, along with a shrinking workforce that poses risks to sustained economic growth.
b. In light of Japan’s ageing population, should the government place greater emphasis on tackling deflation or on cutting its fiscal deficit? [15]
Introduction
Japan’s ageing population presents significant economic challenges, particularly in the areas of deflation and a growing fiscal deficit. Deflation refers to a sustained decrease in the general price level, which can lead to lower consumer spending, reduced business investment, and slower economic growth. On the other hand, a fiscal deficit occurs when government expenditures exceed revenue, leading to increased borrowing and rising national debt. A growing fiscal deficit suggests that government spending is rising, tax revenues are falling, or both, potentially placing further strain on the economy. Given Japan’s demographic shift, the government must carefully consider whether to prioritise tackling deflation to support economic growth or addressing its fiscal deficit to ensure long-term fiscal sustainability.
Why Japanese government should be more concerned with deflation
1. Persistent deflation reduces consumer confidence and spending, as individuals may delay purchases in anticipation of even lower prices in the future. As households postpone consumption, aggregate demand (AD) declines from AD0 to AD1, leading to a fall in real national income via the multiplier effect from Y0 to Y1. Lower AD results in reduced business revenues, discouraging firms from expanding production or hiring more workers. This contributes to lower economic growth and rising unemployment, further reinforcing the deflationary spiral.
2. A deflationary environment breeds pessimism among investors, as firms may view the economy as stagnant or ailing. This leads to a fall in investment (I), reducing AD and further weakening economic growth. From an aggregate supply (AS) perspective, lower investment results in reduced capital stock, leading to lower potential growth in the long run.This can be represented by a leftward shift in LRAS from AS0 to AS1. Deflation may also contribute to a worsening capital account, as foreign investors are reluctant to invest in an economy experiencing prolonged price declines.
3.Japan experienced almost a decade of deflation during the 1990s, which led to a prolonged period of economic stagnation, weak consumer spending, and declining investment. The expectation of continuous price declines resulted in a self-reinforcing cycle of pessimism, where both consumers and businesses refrained from spending. This prolonged stagnation severely weakened Japan’s economic dynamism, reducing productivity growth and innovation. If deflation is not addressed, Japan risks falling back into another period of long-term stagnation, which could be even more damaging given its ageing population.
Why Japanese government should be more concerned with its growing fiscal deficit
A persistent fiscal deficit means that the Japanese government must borrow more to finance its expenditures, leading to a larger national debt. A rising debt level increases interest payments on government bonds, which diverts public funds away from essential services such as healthcare, education, and infrastructure development. There is an opportunity cost involved, as resources used for debt servicing could have been spent on economic development and social welfare programs. Given Japan’s ageing population, the ability to manage future interest payments and debt obligations may become increasingly difficult.
If the Japanese government does not address its fiscal deficit, it may find it difficult to increase government spending when needed in the future. In the event of an economic downturn or financial crisis, the government may struggle to implement expansionary fiscal policies due to limited fiscal capacity. Rising healthcare costs associated with an ageing population will require increased government expenditure, making it essential to stabilise public finances now. If the government fails to reduce its fiscal deficit, it may face challenges in funding critical services, leading to a decline in public welfare and social stability.
In light of ageing population, problem of growing fiscal deficit > problem of deflation
While deflation poses a serious risk to economic growth, addressing the growing fiscal deficit should be the Japanese government’s priority in the long run. There is an inherent conflict between tackling deflation and reducing the fiscal deficit.
Using expansionary fiscal policy to combat deflation (such as increased government spending) would worsen the fiscal deficit, while reducing the fiscal deficit through spending cuts or higher taxes could exacerbate deflationary pressures.
However, Japan’s ageing population makes its fiscal deficit an increasingly urgent issue, as tax revenues are expected to decline, while government spending on pensions and healthcare is set to rise. This suggests that Japan cannot afford to delay addressing its fiscal deficit, as the problem will only worsen over time, making future solutions even more difficult.
Solving the fiscal deficit now is more sustainable than postponing it, as delaying action may require even harsher fiscal adjustments in the future, which could negatively impact social stability.
Conclusion
Japan faces two major economic challenges—persistent deflation, which dampens economic growth and investor confidence, and a growing fiscal deficit, which threatens long-term fiscal sustainability. While deflation can slow economic growth and lead to stagnation, the ageing population makes addressing Japan’s fiscal deficit more urgent. A shrinking workforce means lower tax revenues and rising government expenditures, making debt management increasingly difficult. Although expansionary policies could be used to counter deflation, they risk exacerbating Japan’s fiscal problems. Therefore, given the long-term risks posed by an ageing population, reducing Japan’s fiscal deficit should take priority over addressing deflation, ensuring fiscal stability and economic resilience in the years ahead.
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