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 significantly increase the ratio of government expenditures to GDP. In this paper, we explore the effect of economic growth driven by total factor productivity on Japanese debt in the face of higher future social security expenditures. Our main finding is that a decade of fast growth of total factor productivity, at an average of 6% per year, may help Japan eliminate its debt. This result suggests that the policy makers may well focus on growth-inducing policies such as less distorting taxation and structural reforms that provide incentives for the entrepreneurial activity and innovation to drive growth