Abstract
This paper examines the fiscal viability of localities under serious conditions of population aging and the so-called Trinity Fiscal Reform in Japan with an econometric model. The model assesses the impacts of both declining demand and productive capacity due to change in age-group distributions in the population. The econometric model used to assess these impacts is characterized by an intrinsic combination of demand-oriented short-term mechanisms and supply-side medium-to long-term dynamics, where the balance of aggregate demand and supply determines the cyclic phase of the economy as represented by the overall utilization rate of the production capacity along the long-term path.
The forecast and simulations from this model show that the above-mentioned Trinity Fiscal Reform generates persistent unfavorable impacts on the local governments even with a favorably situated economy like Aichi Prefecture. Unless proper measures are taken, the fiscal soundness of the local governments can not be maintained because the negative impacts of the reform are coupled with serious effects of depression from the aging population.
JEL Classification: C30, C40, C50, H10, H30, H50, O47, R15, R50
