Japanese Real Interest Rates over the Life-Cycle

Japan has faced rapid ageing, persistently low interest rates and deflation for decades. Concurrently, during this period, there has been a gradual convergence in productivity between young and elderly workers. This paper aims to explore the relationship amongst productivity, demographic shifts, and interest rates in Japan during the post-bubble era, using an overlapping generations two-agent New Keynesian (OTANK) life-cycle DSGE model. The narrowing productivity gap between younger and older cohorts puts upward pressure on interest rates. Meanwhile, factors such as longer life expectancy and negative population growth rates exert downward pressure on interest rates. The latter effect dominates. An important policy implication emerges: Enhancing worker productivity across the entire lifespan and bridging the productivity gap between younger and older workers can help offset the decline in interest rates.