Saya Ikegawa

Japan faces considerable fiscal challenges due to rapid population aging. A large body of literature argues that high consumption tax rates or other significant policy changes will be required to stabilize public finances and maintain retirement, health, and long-term care systems. However, all existing quantitative studies ignore the role of intangible capital, thereby understating Japan’s true wealth base and overstating the necessary tax burden. This paper re-examines the fiscal issue by incorporating newly compiled data on Japan’s intangible investments into a dynamic overlapping generations model. We find that the consumption tax rate required to finance increased transfers for the elderly is approximately 6 percentage points lower when accounting for intangible capital, as the enhanced capital stock boosts production and broadens the tax base. Neglecting intangible capital thus significantly overstates Japan’s fiscal challenge.

GDP measures do not incorporate all intangible investment undertaken by firms, although the importance of intangible assets has been increasingly recognized. To provide a more comprehensive picture of macroeconomic conditions, this paper measures intangible investment in Japan, including additional intangible assets that are currently under discussion for inclusion in national accounts. The findings show that intangible investment in Japan is more than twice as large as reported in current national accounts statistics, and that its ratio to GDP is increasing and exceeds that of the United States. Incorporating these additional intangible assets has significant implications for macroeconomic measurement. First, Japan’s five-year GDP growth rate is estimated to increase by approximately 1 percentage point relative to the current measure, while the corresponding estimate for the United States remains largely unchanged. In addition, the impact on GDP varies substantially across industries. Finally, the estimated labor share decreases by about 4 percentage points in both countries.