The Optimum Quantity of Debt for an Aging Japan : Welfare and Demographic Dynamics

Japan’s government is heavily indebted, and the current net debt tends to increase. This paper uses an extended lifecycle general equilibrium model with endogenous fertility to investigate an optimal size of government debt from two viewpoints: individual welfare and future demographic dynamics. A simulation analysis finds that the level of net government debt, which maximizes per-capita utility, is negative at −170% of gross domestic product (GDP) for Japan. In contrast, it substantially decreases the total population in the long run, compared to the baseline simulation with a debt-to-GDP ratio of 150%. Conversely, the level of net government debt, which produces the largest total population for each year, is positive at 220% (or 230%) of GDP approximately from 2045 to 2150; however, it severely deteriorates per-capita utility compared to the baseline simulation