Will a Growth Miracle Reduce Debt in Japan?

Japan has the highest debt to GDP ratio among the developed nations. In addition, the population is projected to age rapidly over the next few decades, which will signi-cantly increase the ratio of government expenditures to GDP. In this paper, we explore the e¤ect of economic growth driven by total factor productivity on Japanese debt in the face of higher future social security expenditures. Our main \u85nding is that a decade of unprecedentedly fast growth of total factor productivity, at an average of 6 % per year, is needed in order for Japan to eliminate its debt. Therefore, absent a drastic cut in government expenditures, our results suggest that the policy makers may well focus on growth-inducing policies such as lower distorting taxation and structural reforms that incentivize the entrepreneurial activity and innovation to drive a decade of miraculous growth. The authors would like to thank Hideaki Hirata, Shigenori Shiratsuka, Wataru Takahashi, Toshiaki Watanabe, and seminar participants at Hitotsubashi University for their useful comments. Views expressed in this paper are those of the authors and do not necessarily reect the o ¢ cial views of the Bank of Japan