Economic Analysis Series No.210THE ECONOMIC ANALYSIS Special Issue: Long-Term Forecasts of Economic and Social Developments in Japan Using New Quantitative DSGE and System Dynamics Models

July, 2025

(Introduction) Introduction to the Special Issue on Long-Term Economic and Social Forecasts for Japan: Mototsugu SHINTANI
(Articles) Challenges in DSGE Model Development: Focusing on the Measurement of Long-Term Effects of Economic Policy: Hirokuni IIBOSHI
Endogenizing Technological Growth in DSGE Models: A Macroeconomic Analysis of Medium- to Long-Term Cycles, Innovation, and Demographic Dynamics: Kazuhiro TERAMOTO
Policy Simulation and Its Implications Using a Newly Developed Quantitative DSGE Model: The Very-Long-Term Forecast for Japanese Economy Under Population Decline: Takuma KAWAMOTO, Ryoji MOCHIZUKI, Kazuhiro TAKAHASHI, Hiroshi NOMURA and Shigeru HIRAI
Revisiting Growth Constraints in the Japanese Economy: The Imbalance between Intangible Asset Investment and Human Capital Formation: Miho TAKIZAWA
System Dynamics: An Integrated Approach to Analyzing Complex Systems: Yutaka TAKAHASHI
Development of a System Dynamics Model for Japan’s Long-term Economic and Social Outlook: Hiroshi NOMURA, Tadashi GONDA, Yota YAMAMOTO and Senri TAKAHASHI
Reflecting on the Experience of Economic Planning: An Oral History from Individuals Involved in the Economic Plans: Tatsuya MARUYAMA
(Submitted Articles) The Impact of Creating Tsunami Disaster Prevention Areas on Land Prices: Kazushi TANAKA
Do Mergers Increase Cost and Profit Efficiency More Than Integration under a BHC?: An Empirical Investigation Using Data on Regional Banks in Japan: Toru NAKAZATO
(Conference Report) ESRI International Conference 2024 “Major Future Economic Challenges”: Economic and Social Research Institute

The full text is written in Japanese.

(Abstract)

(Articles)
Challenges in DSGE Model Development: Focusing on the Measurement of Long-Term Effects of Economic Policy

By Hirokuni IIBOSHI

DSGE (Dynamic Stochastic General Equilibrium) models are primarily used by institutions conducting macroeconomic policy research and implementation, such as central banks and fiscal authorities, with the main purposes of quantitatively measuring the effects of short- to medium-term monetary and fiscal policies and analyzing the contributions to business cycle fluctuations. This paper explores the challenges associated with DSGE models in the context of long-term analysis. First, it surveys previous macroeconomic studies focusing on long-term analysis to extract key characteristics. Then, it examines the limitations of DSGE models in this context. Additionally, the paper extends the discussion to empirical research on long-term effects using the latest reduced-form time series models and compares these models with the structural approach of DSGE models.

JEL Classification Codes: E23, E27, J110
Keywords: DSGE model, simulation analysis, policy analysis

Endogenizing Technological Growth in DSGE Models: A Macroeconomic Analysis of Medium- to Long-Term Cycles, Innovation, and Demographic Dynamics

By Kazuhiro TERAMOTO

This paper presents a Dynamic Stochastic General Equilibrium (DSGE) model that endogenizes technological growth, providing a comprehensive framework for analyzing medium- to long-term economic fluctuations. Unlike traditional DSGE models, which primarily focus on short-term business cycles and treat technological progress as an exogenous factor, this model explicitly in-corporates R&D investment, human capital accumulation, demographic changes, and labor force participation dynamics to examine their interplay with technological development. The findings reveal that different types of productivity shocks lead to distinct economic outcomes. While im-provements in existing technology initially stimulate short-term growth, they divert resources away from innovation, ultimately slowing long-term economic growth. In contrast, enhanced R&D eﬀiciency may temporarily dampen production but fosters sustained technological progress over time. Additionally, declining birth rates and an aging population reduce the productivity of inno-vation, negatively affecting per capita GDP growth. To counteract these adverse effects, proactive policies that support education, workforce development, and human capital investment are essential for sustaining long-term economic vitality.

JEL Classification Codes: E32, O33, O40, J11
Keywords: DSGE model, Endogenous Growth, R&D, Human Capital, Population Decline

Policy Simulation and Its Implications Using a Newly Developed Quantitative DSGE Model: The Very-Long-Term Forecast for Japanese Economy Under Population Decline

By Takuma KAWAMOTO, Ryoji MOCHIZUKI, Kazuhiro TAKAHASHI, Hiroshi NOMURA and Shigeru HIRAI

For Japan to grow sustainably in the face of a declining population, it is essential to enhance its potential growth capacity. Since the impact of population decline, intangible asset accumulation, and human capital investment on the economy are not short-term events, very-long-term analytical tools are required for their assessment. This study employs the Quantitative DSGE model developed based on Teramoto (2025) to simulate the very-long-term economic outlook. Specifically, we incorporate demographic decline and focus on two key drivers of potential growth: (i) the accumulation of intangible assets and (ii) human capital investment. Under multiple policy scenarios, we quantita-tively evaluate the effects of these policies.

Our findings indicate that future population decline will exert a significant negative impact on economic growth. For instance, if the fertility rate stagnates at 1.3, the very-long-term economic growth rate is projected to decline by approximately 2.1 percentage points. Conversely, policy measures such as intangible asset accumulation and human capital investment can substantially enhance long-term economic growth. As an example, continuous policy support for innovation is shown to potentially boost the very-long-term economic growth rate by approximately 1.5 per-centage points.

JEL Classification Codes: E23, E27, J110
Keywords: DSGE model, simulation analysis, policy analysis

Revisiting Growth Constraints in the Japanese Economy: The Imbalance between Intangible Asset Investment and Human Capital Formation

By Miho TAKIZAWA

Japan faces a growing imbalance between investments in intangible assets, such as research and development and information and communication technology, and stagnating corporate spending on education and training. Cost-based estimates of human capital stock indicate a plateau or decline in recent years, raising concerns over deteriorating skill accumulation. This trend reflects a combina-tion of structural factors, including changes in corporate behavior, demographic shifts, and weak institutional support. Given the complementary nature of human and other capital, strategic in-vestment in people is essential to improve productivity. Policy priorities should include sustained support for education, redesigned fiscal incentives for firms, enhanced labor market fluidity, and stronger links between education and industrial needs. Moreover, simulations using dynamic sto-chastic general equilibrium models developed by the Cabinet Office suggest that educational in-vestment can increase the supply of skilled labor, facilitating innovation and long-term economic growth. While this paper does not develop a model itself, it emphasizes the policy relevance of macroeconomic frameworks that incorporate human capital formation as an endogenous driver of growth.

JEL Classification Codes: I20, O30, J24
Keywords: Human Capital, Intangible Assets, R&D, ICT Investment

System Dynamics: An Integrated Approach to Analyzing Complex Systems

By Yutaka TAKAHASHI

This paper presents a background and an analytical approach to understanding system dynamics. System dynamics provides a computer-assisted strategy and policy design approach, aimed at supporting decision-making in the face of complex and dynamic systems. The paper starts by out-lining the framework and key characteristics of system dynamics. It then details the process from model construction to analysis and policy proposals. In particular, it highlights critical consideration for utilizing system dynamics and computer simulations, drawing on recent discussions in the re-search community. The paper concludes by arguing that system dynamics should be more broadly applied to address the diverse social issues stemming from the structure of complex systems, rather than just from uncertainty.

JEL Classification Codes: C60, C63, C69
Keywords: complex system, computer simulation, systems thinking

Development of a System Dynamics Model for Japan’s Long-term Economic and Social Outlook

By Hiroshi NOMURA, Tadashi GONDA, Yota YAMAMOTO and Senri TAKAHASHI

This paper reports the results of a quantitative analysis using a system dynamics model to assess the potential impact of factors such as demographic changes, global warming on Japan’s economy and society, projecting trends up to around 2100.

A key feature of the analysis is that it provides simulations based on changes in tens of thousands of variables. The estimations suggest that Japan's total population around 2100 will range from a maximum of about 130 million to a minimum of about 40 million, compared to a current population of 120 million. Meanwhile, Japan's GDP will range from a maximum of about $20 trillion to a minimum of $3.0 trillion, compared to the current $4.4 trillion. Further, setting Japan's current level of well-being to 1, the level in 2100 will range from a maximum of about 4.0 to a minimum of about 0.2.

The analysis suggests that the distribution of income to younger generations and immigration policies would have a particularly substantial impact on demographic trends. Further, early expansion of renewable energies and domestic production of materials would have a particularly notable impact on progress in decarbonization efforts.

JEL Classification Codes: E27, F6, J110
Keywords: system dynamics, simulation analysis, policy analysis

Reflecting on the Experience of Economic Planning: An Oral History from Individuals Involved in the Economic Plans

By Tatsuya MARUYAMA

The “economic plans” that played a major role in guiding Japan’s economic growth from the post-war period until the time of the reorganization of the central government ministries and agencies in 2001 have been the subject various debates. Employing an oral history approach con-sisting of interviews with staff members of the former Economic Planning Agency that played a role in devising economic plans during that period, this paper seeks to understand their perceptions of those economic plans at the time and organize their reflections from a present-day perspective. The interviews highlight two aspects regarding the evaluation of the functions and roles of the economic plans and the Economic Council, which was responsible for investigating and deliberating on these plans, namely: (1) the importance of Council members acting as stakeholders in building consensus within the Economic Council, and (2) the importance of ensuring that the policies im-plemented by the various ministries were consistent in the medium to long term. In addition to these interviews, academic experts in the areas of economics, public administration, and political science were asked to provide their assessment of the economic plans from a contemporary viewpoint, offering a dif-ferent perspective from those involved in devising the plans. Taking these comments from third-party academic experts and the points raised in the oral history findings into account will help to continue to deepen our understanding of the role that the economic plans have played and the lessons that can be learned from them.

JEL Classification Codes: O21, O11, O53
Keywords: Economic plans, Economic Council, Economic Planning Agency

(Submitted Article)
The Impact of Creating Tsunami Disaster Prevention Areas on Land Prices

By Kazushi TANAKA

Based on the lessons learned from the Great East Japan Earthquake, the Act on Regional De-velopment for Tsunami Disaster Prevention　was established in December 2011.As of September 2023, 40 prefectures have published tsunami flood suppositions for maximum level tsunami oc-currences under the Act, but only 26 prefectures have been designated as Tsunami Disaster Caution Zones to strengthen warning and evacuation systems, due to concerns about falling land prices and other factors. Difference in Differences estimation using the two-way fixed effect model for land price announcements in Tokushima and Kochi prefectures, which were the first prefectures to use this legal system, showed no significant decline in land prices due to the designation as Tsunami Disaster Caution Zones, but rather a positive effect. Although we cannot rule out the possibility that the positive effect may have been caused by a distortion of the estimation results due to the impact of the land price decline caused by concerns about the maximum tsunami in Kochi Prefecture, in view of the fact that Tsunami Disaster Caution Zone is a policy area to promote tsunami disaster pre-vention, the increased safety of the area may have suppressed the downward trend of land prices. In addition, the effect of tsunami evacuation buildings and tsunami evacuation towers was examined and it was found to have a 2.4% positive impact on land prices in the surrounding area.

JEL Classification Codes: R14, R52, H43
Keywords: Tsunami disaster risk, land prices, hazard maps

Do Mergers Increase Cost and Profit Efficiency More Than Integration under a BHC?: An Empirical Investigation Using Data on Regional Banks in Japan

By Toru NAKAZATO

Japan’s regional banks are under pressure to consolidate amid low interest rates and a shrinking population. This paper explores the effect of bank consolidation on the efficiency and profitability of Japanese regional banks using panel data over the period 2004-2018. As for banks owned by bank holding companies, we find that a decrease in overhead ratio (OHR) and an increase in return on assets (ROA) are observed after consolidation, while for post-merger banks, we find that an increase in OHR is observed before the merger and no clear benefit is obtained from bank mergers. These findings suggest that mergers are not the only way to improve the operating performance of regional banks.

JEL Classification Codes: G21, G28, G34
Keywords: regional banks, mergers, bank holding company, effects of consolidation

(Conference Report)
ESRI International Conference 2024 “Major Future Economic Challenges”

Economic and Social Research Institute

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