EFFECTS OF DEMOGRAPHIC TRANSITION ON JAPAN’S ECONOMIC GROWTH AND INFLATION

Abstract

This study empirically explores the likely effects of active-age and elderly populations on Japan’s real GDP growth and inflation. Annual data from 1986 to 2019 are used to avoid the COVID-19 unusual period. DF-GLS and Ng-Perron unit root tests, ARDL bounds testing procedure for co-integration and associated VECMs are implemented. Unit root tests results display a mixture of I(0) and I(1) behaviors of variables with no I(2) behavior. An ARDL bound testing confirms co-integrating relationship among the variables in both real GDP growth and inflation equations. Their respective associated VECM results reveal relatively fast adjustments toward long-run equilibria. Elderly population shows contractionary effect on real GDP growth, while active-age population reveals, otherwise. In inflation related VECM estimates, both segments of population add to inflationary pressure through respective consumption channels.