Japan: Deficits, Demography, and Deflation

By 2005, Japan's debt had risen to 163% of GDP. For more than a decade, the government had run huge deficits, trying unsuccessfully to stimulate economic growth. Interest rates, meanwhile, had been zero for years. But with slow growth and banks in crisis, nothing had worked very well until some recovery in 2004. Now, the government is trying to repair its fiscal damage in the face of continuing slow growth and huge pension and health care obligations to a population that is aging fast. Hezio Takenaka, the minister for economy and postal privatization, faces a imposing agenda—to restart the economy while lowering the deficits and reforming social security. For a supplement to this material, please see "Japan: Abe's Three Arrows?" (714-017).