Research Fellow Naoki Nagashima
It is imperative that Japan accelerate its structural reforms in order to alleviate problems of non-performing bank loans and inefficient operation of governmental institutions. However, with Japan's current confrontation with a long ignored "structural supply and demand gap", there is much friction in the reform process and a very high probability that the process will not be a smooth one. The ideal scenario would be to raise the stagnating consumption demand of recent years while at the same time accelerating structural reform in one motion-without imposing a financial burden on the economy. The atrophy of consumption of the higher income brackets and baby boom generation lies at the root of present consumption stagnation. In particular, baby boomers are now entering an increasingly savings-oriented life cycle and many may be dogged by lowered expectations for the future.
Based on the consideration of the above issues, this report will investigate how the expectation and risk factors of expected income, expected inflation, and income risk affect average consumption tendencies. Through stratified income analysis, the following conclusions can be made.
If we presume that the baby boom generation suppresses consumption according to their life cycle, then the above analysis allows us to make the following policy implication: "Consumption by the baby boom generation can be accelerated by raising expected inflation". Specifically, "implementation of income tax reduction and measured consumption tax increases targeting luxury consumption" would be an effective set of policies. Revising the ratio of direct to indirect taxes while simultaneously spurring consumption demand in such a way as to avoid incurring additional financial burden is particularly promising.