It's a simple observation, but things look tough in the long run — Reading the NIRA paper 'Long-term Prospects for the Japanese Economy and Fiscal Policy under Population Decline'

Hello, everyone.
I'm Nito Kazeda, a perpetual low-level employee at some company who, for some reason, calls myself the 'Leader of the Labor Party.' Whether you're interested in politics and economics or not, welcome.

First, a quick plug. The Labor Party's website is here
(It really exists, I'm not joking.)

Now then, the previous article was titled
Labor Party Policy Collection 2026, The First Step — Setting Out on a Journey to Peek into the National Wallet
.

What I was saying back then was roughly this.

• If you're going to think about policy, it's meaningless unless you look at the wallet first. No matter how much you talk about ideals, if the budget isn't realistic, it's just armchair theory.

• Besides, if we're going to do it, let's think about it while keeping an eye on long-term fiscal prospects, working backward from the future vision we've arbitrarily decided on as the 'Golden 2050'.

• And, since I'm an amateur, I'll gratefully borrow the knowledge of those who came before me regarding long-term fiscal outlooks.

…Yes. And so, the 'journey to peek into the national wallet' began.

For the first step of that journey, I read a report published by NIRA (Nippon Institute for Research Advancement). The topic is—

'Long-term Prospects for the Japanese Economy and Fiscal Policy under Population Decline: Depicting the State of Households in 2060'

My impression after reading it is… well, it's obvious, but it's definitely a trend toward tax increases.

So, I actually read this report.
And you know what? There were two scenarios.

• Baseline Projection
  If things continue as they are without any changes, the primary balance will remain in deficit until 2060. Debt will follow a divergent path relative to GDP.

• PB Zero Scenario
  If we work hard to 'make the deficit zero' by increasing taxes a little bit every year. If this continues, it will eventually reach about 19-20% in terms of consumption tax. Debt will stabilize at 184% of GDP.

…Man, that's brutal.
The 'deficit-bleeding course' or the '20% consumption tax course.' Either way, it gives me a stomachache.

For our generation, there was even a calculation that an additional burden of about 20,000 to 30,000 yen per month would be placed on us in our old age.
Just reading it makes me want to roll my eyes back in my head.

But when you think about it, it's obvious, isn't it?
The population is shrinking, the elderly are increasing, economic growth is sluggish, and medical and nursing care costs are ballooning.
It's actually more optimistic to think that 'we'll be fine without tax increases.'

What is NIRA?

So, who exactly is NIRA, the organization that wrote this report?
Its official name is 'Nippon Institute for Research Advancement,' and it's an independent think tank established in 1974. Apparently, its office is now on the 34th floor of the Yebisu Garden Place Tower. Sounds fancy.

When you hear 'think tank,' you tend to imagine shady shadow organizations or government offshoots, but it clearly states here that they are independent and non-governmental. Even in the English description, it is explicitly stated as an 'independent, non-governmental Japanese think tank.'

What they do is simple: they research the long-term challenges facing Japan and offer proposals like, 'Wouldn't it be better to do this?' They publish these in the form of opinion papers and research reports, and this report is one of them.

You're curious about where the funding comes from, right? It started as a foundation with contributions from the national government, local governments, and private companies, and it is now a public interest incorporated foundation. Looking at the directors and councilors, you see a mix of scholars and business people; it's the type of organization that doesn't feel like a 'government lackey,' but rather one that aggressively puts forward policy discussions from the outside.

To summarize the report very roughly:

First, let me say this: this report is serious.
It's packed with graphs, mathematical formulas, and estimation conditions, the kind of thing that makes your eyes glaze over if you try to skim it.

So, from here on, this is strictly my rough summary.
If you want to see the proper evidence and calculation formulas, please check the original text. That is overwhelmingly more precise.

So, to summarize it roughly:

1. 'Baseline Projection' for the Japanese Economy 2025–2060

This is a simulation of a scenario where nothing is done and nothing happens: the population declines, productivity remains low, interest rates and growth rates are roughly the same, and policies remain as they are. Naturally, debt increases to a deadly extent. Deadly.

2. 'Zero Primary Balance Scenario' 2025–2060

This is about raising taxes little by little every year to reach a primary balance of zero by 2060. In this case, it would be a tax increase equivalent to about 20% in consumption tax by around 2060. And, a competition for consumption between the non-market sector (medical care and nursing care) and the market sector (goods and services) will occur = life will become difficult. It's painful.

3. Examination of Fiscal Risks

This organizes the terrifying fiscal risks ignored in the two estimates above. The three introduced are: the risk of endless deficits, the risk of interest rates falling too low, and conversely, the risk of them rising. In particular, if 'r-g > 0'—that is, if interest rates exceed the growth rate—there is no way out.

4. Impact of Economic Growth

In the end, it means we'll be saved if we grow, right? If productivity increases by 0.5%, the debt-to-GDP ratio improves by nearly 20% even in the 'baseline projection' where nothing is done. Seriously? Do we have no choice but to do it?

5. Longer-term Goals

This is the main argument of the paper, isn't it? Settle down and tackle population and productivity. If things stay as they are, people will disappear from Japan in the ultra-long term. Therefore, the conclusion is to put effort into labor market reform and investment in human capital.

The four conditions of the 'nothing happens and nothing is done' baseline

This report first sets up a scenario called the 'baseline projection'.
It's a premise of 'nothing happens and nothing is done.' The conditions are like this:

1. Population decline and aging will not stop
   Even if the birth rate recovers suddenly, the working-age population will not increase for a long time. Therefore, the number of employed people will decrease, and medical, nursing, and pension costs will gradually increase.

2. Productivity remains low and sluggish
   The growth rate of total factor productivity is 0.5%. This is close to the lower limit even among major developed countries. In short, it assumes that 'the status quo is maintained and no particular breakthrough will occur.'

3. Interest rates and growth rates are roughly the same (r-g=0)
   The setting is that "interest rates will not exceed the growth rate" in the long term. Assuming a 2% inflation target, the 10-year government bond yield will settle in line with the growth rate.

4. Policies remain as they are
   Fiscal and monetary policies will not be particularly altered. Tax rates and social insurance premiums are fixed as a percentage of GDP. Therefore, naturally, the primary balance (PB) deficit will continue to accumulate.

An important note here.
As emphasized in the paper, this ismerely a scenario for estimation purposes.
It does not say that "high probability = high likelihood of reality following this path."
In short, it is a "provisional foundation" that shows "what would happen if nothing else occurred."

──Yes, when you stack these four conditions, it leads to the conclusion that "if you do nothing, debt will just keep increasing."

And indeed, the debt increases.
Specifically, even in 2060, the primary balance remains in deficit, with adeficit of 4.1% of GDP remaining.
As a result, the government'snet debt balance is on a divergent course relative to GDP. In other words, it means it will "continue to expand without limit."

In short, if we proceed along the baseline, a future awaits us where the "debt meter" will break through the ceiling by the time we reach old age.

The severity of fiscal risk

The nasty part of this report is that it doesn't just show the "baseline" and "PB zero," but it also calmly lists thatthere are additional risks as well.
In other words, it goes out of its way to show us "what happens if things don't go according to the premises?"

1. The risk that the PB deficit will continue
   Looking back at the past, a PB surplus hasn't been achieved even once since the 2000s.
   The reason is simple: we cannot stop the growth of social security costs, defense spending is increasing, we want to expand measures for the declining birthrate, and on top of that, we are scattering supplementary budgets every year...
   What happens as a result? Even if interest rates and growth rates are the same, debt will follow a divergent course just by the PB deficit continuing. In other words, "the debt is indeed snowballing."

2. The risk of interest rates remaining lower than the growth rate (r-g<0)
   "Wait, isn't it helpful if interest rates are low?" you might think. Certainly, on the surface, even if there is a PB deficit, the debt-to-GDP ratio becomes easier to stabilize.
   But behind the scenes, financial institutions are being made to hold government bonds, and the public is bearing the brunt of the decline throughinflation tax caused by rising prices.
   In other words, it's a state where "the government gets relief, but the public and financial institutions are secretly made to pay the bill." Moreover, if it goes too far, it invites currency depreciation and capital flight, eventually returning to the risk of interest rates jumping.

3. The risk of interest rates exceeding the growth rate (r-g>0)
   This is the scariest one. If a downgrade of government bonds occurs or capital flees overseas, interest rates will rise in the blink of an eye.
   Moreover, if an event on the scale of the COVID-19 pandemic or the Lehman Shock occurs, nominal GDP will fall while fiscal spending increases, so thedebt-to-GDP ratio will deteriorate all at once.
   According to the authors' estimates, if interest rates are just 1% higher than the baseline, by 2060 thedebt-to-GDP ratio will increase by another 66 points.
   In short, once you fall into a state where "interest rates > growth rate," it becomes unsustainable unless the PB is turned into a surplus.

──When you line them up like this, even the baseline is tough, and you can see through to a future where it becomes "checkmate" just by the conditions crumbling slightly.
The cold-bloodedness of the report is exactly in these kinds of points.

The impact brought about by economic growth

Up to this point, it has been all scary stories about debt, but there isone part that offers a little hope in the report.
That is the "effect of economic growth."

According to the authors' calculations, if total factor productivity (TFP) justincreases by 0.5 percentage points, the debt-to-GDP ratio in 2060 willimprove by about 20%.
You might think, "Is it only 0.5%?" but conversely, it means that even that much makes a big difference.

Of course, it's not a sweet story where "if we grow, everything is solved!"
If we grow, interest rates will rise somewhat, and demand for funds will increase, so it might not go as well as the simulation.
But even so, if we can boost productivity and the labor force, we can slightly alleviate the debt hell.

The paper itself just touches on it calmly and briefly, but from my perspective as a reader, I thought, "This is the only hope!"

Longer-term goals—Focus on population and productivity

The end of the report is a quite heavy message.
It's the argument that "we assumed in the baseline that population decline and low growth cannot be changed, but what is truly important is the effort to change this."

In other words, population and productivity are the main targets.
Unless we focus on these two, no matter what tax increases or stopgap adjustments we make, it's just a drop in the bucket.

Specifically, things like labor market reform and investment in human capital.
Loosening rigid employment systems to allow for labor mobility.
Creating an environment where people can take on the challenge of innovation while ensuring their livelihoods.
If we don't rebuild society starting from the 'foundation of how we work' in that way, we can see a future where people disappear from Japan in the ultra-long term.

—Well, the language in the paper is much more level-headed, but in short, it's 'we have no choice but to do it'.
It was a severe conclusion that if we want to sustain public finances, there is no other path but to face the issues of population and productivity head-on.

Summary—Even with generous conditions, this is the result. And what will I do?

So, I've roughly followed the NIRA report.
What I feel once again is that even though the preconditions are set quite 'generously,' this is the estimate.

• If we do nothing, the primary balance will remain in deficit in 2060. Debt will be sky-high.

• If we try hard to bring the deficit to zero, we're looking at a 20% consumption tax course. Life will be quite tough.

• Furthermore, if risk factors (such as rising interest rates or budget expansion) are added, an even harsher future awaits.

…Yes, that was my simple, elementary-level observation.
And here is where my argument begins.

As for the Labor Party's policy, I believe that we should aim for a surplus, not just a zero primary balance. The paper presented three main directions for achieving a zero primary balance (from the chapter 'Trade-offs between the Non-market and Market Sectors').

1. Raising taxes and social insurance premiums
   This places a burden on the working generation. There is a risk that work motivation will decline.

2. Raising the consumption tax
   This is a broad burden across all generations. However, it is a direct hit to household consumption.

3. Curbing the growth of benefits such as medical care and nursing care
   This reduces spending skewed toward the non-market sector and redirects limited resources to the market sector.

Comparing them, I definitely want to take the direction of curbing benefits. This is because I want to prioritize population improvement above all else.
If we impose an excessive burden on the working generation, the child-rearing generation will suffer even more, and the declining birthrate will accelerate.
Even if we raise the consumption tax significantly, consumer desire will wither, and the economy won't circulate.

That is why I think it is important to 'narrow down to necessary medical and nursing care' and 'lighten the burden on the non-market sector through efficiency and technological innovation'.
If we are to think about fiscal reconstruction and measures against population decline at the same time, that seems to be the only realistic path.

And finally.
Professional papers really are different.
They systematically present what an amateur like me feels is 'somehow dangerous,' including risk assessment. It is truly helpful and I am very grateful.

Thank you for reading this far.
Although I called this article a 'simple observation,' I ended up talking at length, didn't I?

If you found this insightful, I would be very encouraged if you could share, follow, and support me with a 'like' (reaction).

I will continue to share information about the Labor Party's policies on the Labor Party website and this blog, so I would be happy if you would check back in the future.

See you next time. Thank you very much!