A Numerical Evaluation on a Sustainable Size of Primary Deficit in Japan

We investigate how large a size of primary deficit to GDP ratio the Japan’s government can sustain. For this investigation, we construct an overlapping generations model, in which multi-generational households live and the government maintains a constant ratio of primary deficit to GDP. We numerically show that the primary deficit cannot be sustained unless the rate of economic growth is unrealistically high, which is more than five percent according to our settings. Our result implies that Japan’s government needs to achieve a positive primary balance in the long-run in order to avoid the divergence of the public debt to GDP ratio.