Ageing Japan

The ageing population of Japan was making it difficult to finance the pension bill, which in turn was putting pressure on the national fiscal deficit. To combat this problem economist suggested three options.

1) Cut in public expenditure.

2) Broadening of the tax base.

3) Hike in the consumption tax.

In Japan, the public investment was significantly higher at 60% of the GDP. It would generated long term welfare gains but was economically risky.

Broadening the tax base means increasing the retirement age from 62 to 65. Increasing the consumption tax meant hiking it from the present level of 5%(2004), which was relatively low by international standards. But the government was not in its favor, because in 1997 when the taxes were hiked, the economy slid into recession due to cut in consumer's expenditure.