THE HIGH JAPANESE SAVING RATIO - Will it really decline rapidly? - by Kenichi KAWASAKI Economic Research Institute Economic Planning Agency

Transcription

1 Discussion Paper No. 63 THE HIGH JAPANESE SAVING RATIO - Will it really decline rapidly? - by Kenichi KAWASAKI Economic Research Institute Economic Planning Agency January 1996 Economic Research Institute Economic Planning Agency Tokyo, Japan

2 The views expressed here are the author s and do not represent those of the Economic Planning Agency.

3 The high Japanese saving ratio: Will it really decline rapidly? by Kenichi KAWASAKI Economic Research Institute, Economic Planning Agency January 1996 Abstract In the 1980s, Japan was the world's dominant supplier of net capital to the world. However, according to life-cycle model simulations, the Japanese saving ratio is expected to show a substantial decline beyond the year 2000 due to the rapid ageing of the population. This paper examines the factors that contribute to the high Japanese saving ratio relative to other countries and discuss outlook for saving trends. Cross-country data shows a correlation between the saving ratios and the rates of economic growth. However, quantitative evidence is not always convincing because the causality is not clear-cut and there are measurement problems which are not negligible. The high saving ratios and rates of economic growth are rather common features in East Asian economies. Other factors commonly found in Asian economies and societies may work. Although, it is thought that saving motives and structural factors such as government policies and institutional and cultural factors have played a relatively less important role in the determination of the saving ratio. A growing body of evidence has put doubt on the validity of the simple form of the life-cycle hypothesis. The demographic patterns for the next few decades are already largely known. However, developments of dependency ratio would be less certain. The Japanese "effective" dependency ratio would not decline as much as the conventional definition suggests. In any event, the saving ratio would largely depend on the extent of how the elderly would continue working and saving. What is more important is the reason why saving shortage occurs. For example, if the ageing of the population imposes further pension contribution and/or tax on domestic firms, this might induce them to invest abroad in order to seek lower costs. Such a distortion on the market by the institutional framework either intentionally or unintentionally should be a matter of concern. i

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7 THE HIGH JAPANESE SAVING RATIO - Will it really decline rapidly? - by Kenichi KAWASAKI Economic Research Institute Economic Planning Agency The earlier version of this paper was presented at the OECD Policy Dialogue with Dynamic Non-Member Economies of WORKSHOP ON PUBLIC SECTOR FINANCES AND THE EVOLUTION OF SAVING AND INVESTMENT BALANCES held in Paris on October, The author is grateful for comments by the participants to the Workshop as well as useful suggestions by colleagues both inside and outside the Economic Research Institute including those particularly by Mr. Shoichi KOJIMA, the Director-General for the ERI. Efficient statistical assistance by Mr. Masayuki MIYAMOTO, the ERI, should be also acknowledged. The views expressed here are the author s and do not represent those of the Economic Planning Agency. iii

8 TABLE OF CONTENTS I. INTRODUCTION 1 II. TRENDS IN SAVING AND INVESTMENT 2 a. Long-term saving-investment balance 2 b. Historical developments in household saving 2 III. FACTORS AFFECTING SAVING BEHAVIOUR 5 a. Measurement issues 5 b. Macroeconomic factors 6 c. Saving motives 6 d. Structural factors 8 IV. THE OUTLOOK 12 a. Influence of the ageing of the population 12 b. Adequacy of saving 15 V. SUMMARY AND CONCLUDING REMARKS 18 a. Summary 18 b. Concluding remarks 18 REFERENCES 20 iv

9 TABLES Table 1 Saving motives 22 2 Assumptions in population projections 23 3 Labour force participation ratios of the elderly 24 CHARTS Chart 1-A Corporate saving, investment and I-S balance 25 1-B Household saving, investment and I-S balance 25 1-C General government saving, investment and I-S balance 26 1-D External balance 26 2 Household saving-ratio developments 27 3 Business cycle and the average propensity to consume 28 4 Alternative aged dependency ratio 29 5 Labour force participation ratios for men and women 30 6 Age-saving profiles adjustment 31 7 Public consumption and investment 32 v

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11 THE HIGH JAPANESE SAVING RATIO - Will it really decline rapidly? - I. INTRODUCTION Throughout the world, there are currently large potential investment demands, especially in Central and Eastern Europe and in the dynamic emerging economies in Asia and Latin America. On the other hand, the saving ratios in many of the OECD countries have declined and budget deficits have continued. The possibility of a world capital shortage over the coming years has been raised as a matter of concern. In the 1980s, the Japanese economy experienced faster economic growth than most OECD countries and a widening-current account surplus. As a result, Japan was the world's dominant supplier of net capital to the world. According to IMF data, Japan supplied proportionally more saving (13 per cent of world saving) than the size of the GDP (9 per cent of world output) would suggest in In the coming years, rapid ageing of the Japanese population is projected. According to life-cycle model simulations, the Japanese saving ratio is expected to show a substantial decline beyond the year The implications of this for the domestic and international economy should be important. This paper examines Japanese saving, and is a follow-up to my previous paper (Kawasaki (1990)) on this subject. It incorporates much new information obtained mainly through recent discussions by experts in Japan. The purpose is: first, to summarise the factors that contribute to the high saving ratio relative to other countries, especially the high household saving ratio; and second, to discuss the outlook for saving trends while clarifying some uncertainties that may contribute to its rapid decline. -1-

12 II. TRENDS IN SAVING AND INVESTMENT a. Long-term saving - investment balance The saving and investment developments in Japan are shown on chart 1, and are broken down into sectors, i.e. private (corporate and household) and public (general government). (Chart 1-A : Corporate saving, investment and I-S balance) (Chart 1-B : Household saving, investment and I-S balance) (Chart 1-C : General government saving, investment and I-S balance) (Chart 1-D : External balance) From the 1950s to the early 1970s, Japan experienced rapid economic growth. The corporate sector actively invested during this time to expand productive capacity. The investment ratio to GDP reached more than 25 per cent at its peak in Although the high investment ratio has declined in the 1980s (around 15 per cent of GDP), the corporate sector has continued to generate excess investment over saving. Household saving has been a major source of funds for investment (see below). The excess of saving over investment has accounted for 6 to 8 per cent of GDP, and has offset the excess investment in the corporate sector. The saving and investment balance in the private sector as a whole has been more stable than that in the corporate and the household sectors. The public investment ratio has been stable (between 4 to 6 per cent of GDP) over the last four decades compared with that in the private sector. While, the public saving ratio declined from the mid-1970s to mid-1980s. Since then it has shown an increase by more than 7 per cent until However, as the Japanese economy entered the last recession (April 1992 through to October 1994), the saving ratio has decreased. In addition, public investment rose several times through the Economic Packages created to stimulate economy. The excess of saving over investment rapidly diminished and the public sector resulted in a net saving deficit since b. Historical developments in household saving As in most OECD countries, the Japanese net household saving ratio increased during the 1960s and reached a peak in the mid-1970s at about 23 per cent of disposable -2-

13 income; since then it has shown a moderate downward trend, falling to 13 per cent. However, this level is still high by OECD standards, the average in 1993 being around 11 per cent. (Chart 2 : Household saving-ratio developments) The factors underlying the high saving ratio may have varied through time, although some factors have made a consistent contribution throughout. It is therefore important to distinguish between factors which explain historical changes in the Japanese saving-ratio trends and factors which explain the generally high level itself compared with that in other countries. As concerns trends in the saving ratio, there are several possible arguments which explain the causality from economic growth to the saving ratio. For example, the permanent-income hypothesis, which implies a higher propensity to save out of transitory income than permanent income, argues for a positive influence of income growth on the household saving ratio if the income growth is faster than expected or believed to be temporary. On the other hand, the high level of household saving could contribute to persistent rapid growth. However, the empirical evidence is not robust, because simultaneity makes estimation methods difficult. It should be noted that in the 1980s, when the average growth rate was lower than that in the 1960s, the household saving ratio was even, although marginally, higher (14.7 per cent of disposable income) than that in the 1960s (14.0 per cent). Inflation, especially the double-digit inflation following the first oil shock, exerted a strong positive effect on the saving ratio. Though theoretically inflation can have either a positive or negative impact on saving, it is suggested that the positive effects outweigh the negative ones. Among various possible reasons, it should be noted that the treatment of interest payments in the standard national accounts could contribute to increases in measured saving. In times of inflation, part of interest payments represents compensation for holding losses on monetary assets and should therefore be deducted from both current income and current saving. Such an adjustment is not made in the national accounts. Hence, when inflation rises there will be an increase in the measured saving ratio if households do not alter their real consumption behaviour, since both saving and income will increase by the same absolute amount. This could be one of the important reason why the measured household saving ratio was high in the 1970s. Further details are discussed in Dean et al. (1989). -3-

14 An econometric study shows weak correlation between the consumption behaviour of Japanese households (measured by the average propensity to consume in the "Family Income and Expenditure Survey (FIES)") and consumer's confidence (measured by the Consumer Sentiment Indices (CSI) in the "Consumer Behaviour Survey"). Consumers are sensitive to changes in the economic environment in general and to inflation developments in particular. The CSI can be a good indicator for the business cycle. However, the observed household consumption behaviour is different from what the CSI developments suggest. The saving ratio or the propensity to consume has been stable over the business cycle, which is rather volatile and short, and whose duration is around four years on average. (Chart 3 : Business cycle and the average propensity to consume) -4-

15 III. FACTORS AFFECTING SAVING BEHAVIOUR As is seen above, even in a period of relatively stable growth and inflation, there remain important factors which would explain the higher Japanese saving ratio compared with that in other countries. In this section, those factors are surveyed beginning with measurement issues. a. Measurement issues The measurement of saving ratios differs between countries for various practical reasons, in the standard national accounts. There are, for example, three major differences between Japan and the United States. Firstly, consumption of fixed capital is valued at historical cost in Japan but at replacement cost in the United States. Secondly, capital transfers are excluded from both saving and disposable income in Japan but are included in the United States. Thirdly, interest paid by households to business or foreigners is excluded from personal disposable income in Japan but included in the United States. According to Hayashi (1986) adjustment for the first factor lowers the Japanese household saving ratio by two to three percentage points and that of the second factor lowers it by close to one percentage point. Further adjustments to the standard definition of household saving in the System of National Accounts (SNA) are discussed in the literature. Blades (1988) shows adjustments of the saving ratio series for several countries treating: 1) expenditure on consumer durable goods as capital investment by households with the flow of services from such durables being counted as consumption; 2) the change in private pension and life insurance funds as saving by financial institutions rather than households; and 3) saving of social security funds as household saving. When comparing the saving ratios in Japan and the United States, the most important adjustment concerns the adjustment for consumer durables. While the gross household saving ratios as defined in SNA for Japan and the United Sates are 23.0 per cent and 14.3 per cent (average for the years ), figures adjusted for the different treatment of consumer durables are 26.1 per cent and 23.6 per cant. The Japanese household saving ratio is also considerably reduced when other adjustments are made to the standard concepts of income and consumption. Takayama et al. (1988) examine three main factors: 1) re-estimation of imputed rent incorporating the land price explicitly, 2) inclusion of medical benefits in kind both in income and consumption, and -5-

16 3) taking into account depreciation of consumer durables and housing. The Japanese household saving ratio in 1984 was reduced from 26.2 per cent to 9.3 per cent after the above three and other adjustments. Even after all such adjustments are made, the Japanese household saving ratio seems to remain relatively high compared with other countries where similar adjustments have been made. In addition, it should be noted that when these adjustments to household saving are made, there are counterpart adjustments that need to be made elsewhere in the system, so that national saving may not change as much. Conceptual differences and their adjustments cannot entirely explain the disparities between the countries. b. Macroeconomic factors Cross-country data shows a correlation between the saving ratios and the rates of economic growth. Higher saving might raise the rate of economic growth through increasing investment. While, higher economic growth might result in higher saving ratio. However, as discussed above, it is difficult to identify the causality between the two. As is shown in IMF (1995), the high saving ratios and rates of economic growth are rather common features in East Asian economies. Other factors commonly found in Asian economies and societies may work (see below). c. Saving motives According to the "Public Opinion Survey on Saving" carried out by the Central Council for Saving Promotion, an organization associated with the Bank of Japan, there are three major motives for Japanese households to save. The first is for future consumption expenditures on children's education and others. The second is for purchase of real assets such as land and housing. The third is for precautionary purposes and for retirement. On balance, it is found that they do not provide a strong enough explanation for the high Japanese saving ratio. While all three motives may be important from the point of view of individual household behaviour, from the point of view of the household sector as a whole, they may be relatively unimportant because the considerable gross saving associated with these motives in certain households is offset by a comparable dissaving for the same motives in others. Saving motives are not important in explaining the saving ratio of the household sector as a whole under a stationary economy. However, the assumption is not satisfied in -6-

17 the real world where growth has typically been important, especially so in the case of Japan. (Table 1 : Saving motives) i. Educational expenses During the post-war period, the proportion of Japanese children entering college or university has increased sharply (from 10.3 per cent in 1960 to 37.8 per cent in 1975 and remained around the same level afterward according to the "School Basic Survey" by the Ministry of Education) and this ratio has been one of the highest in OECD countries. Because of the rapid increase in higher education associated with rapid economic growth in the 1960s to the mid-1970s, saving for education has probably been positive. The college entrance ratio has relatively stabilised in recent years, education-related saving may now contribute less. The Economic Planning Agency (1988) suggests that the expansion in the availability of scholarships has contributed to stabilising the proportion of workers' educational expenditure to their income after the mid-1970s. Although, it should be noted that this ratio picked up to 43.3 per cent in 1994 from 38.9 per cent in ii. Land and housing purchase It is often asserted that, because of the high price of land and housing, and the strong preference for home-ownership saving for housing purchase is particularly important in Japan. In fact household land assets amounted to 1,159 billion yen at the end of 1993, which corresponds to 28 million yen per household, although this is less than the historical peak of 1,495 trillion yen at the end of The price of owner-occupied houses (including land) amounted to eight and a half times average household annual disposable income in The Japanese government has set a target in the "Medium-term Economic Plan, 1992" to reduce this ratio to less than five times by fiscal year This target seems to be already reached in 1995 partly because of the recent burst of the bubble economy. During the rapid growth period, industrialisation induced many families to move from the countryside to urban areas, especially the three metropolitan areas. New arrivals lived in rented apartments while they saved enough money for a down-payment, but eventually moved into houses they purchased. More than 60 per cent of households are now homeowners. The Economic Planning Agency (1982) shows that this ratio is slightly lower -7-

18 than that of the United States but considerably higher than that of larger European countries except the United Kingdom. The housing-related saving would be more likely to be attributable to the level of land/housing prices rather than to the unavailability of the housing loans as far as there are important saving, both of the pre-purchase households and the post-purchase households. Horioka (1988) points out that, if the saving for the down-payment decreases due to the increasing availability of housing loans, there will be increased saving in the form of housing loan repayments and thus the total amount of housing-related saving will not necessarily decline. iii. Saving for precautionary purposes and for retirement According to the life-cycle hypothesis, the primary motive for saving is to provide for retirement. The insufficient provisions at the incipient stage of the public pension system in Japan may have forced the Japanese in the past to continue to work and to save more. Economic Planning Agency (1982) shows the ratio of public pension benefits to the average worker's salary has jumped from a ratio of 10 to 20 per cent in the 1960s through to the mid- 1970s to 40 per cent at the beginning of the 1980s, a ratio which is similar to that in other developed countries. However, the likely effect of public pension schemes or social securities on household saving is said to be theoretically uncertain. Public pensions represent an alternative source of funds for financing living expenses during retirement, hence they would tend to reduce private saving. On the other hand, to the extent that such pensions induce workers to retire earlier, thereby necessitating more saving for retirement, such pensions would tend to increase private saving. Kojima (1995), looking at longer-term data on saving trends, points out the fact that the saving ratio has not been affected by the build-up of social security funds. Moreover, he argues that some basic inefficiency exists in the Japanese economy. By leading to a lower level of residential and infrastructure investment and consumption, this inefficiency has prevented the Japanese people from enjoying a standard of living comparable to their income. It has also affected their investment and saving patterns. d. Structural factors There are many structural factors which affect private saving behaviour. In this -8-

19 section factors not mentioned above such as government policy and institutional and cultural factors are surveyed. The survey in this part owes particularly to Horioka (1990). For details, see his article. These factors do not generally provide a strong explanation of the high Japanese saving ratio. i. Government policy The Japanese government has engaged in a variety of policies designed to promote saving since the 1870s. In 1875, the government established the postal saving system in order to encourage individual saving. During the post-war period, the government has continued to engage in saving promotion, through the establishment of the "Saving Promotion Department of the Bank of Japan (1946)", the "Council for Saving Promotion (1952)", and the "Saving Promotion Centre of the Ministry of Finance (1957)". In recent years, in response to criticism from abroad, saving promotion has been de-emphasised. However, it appears that such policies have been more widespread in Japan than in other countries. - Tax systems There are many different tax instruments which influence saving. Most of the interest income from consumer savings had been tax exempt and interest payments on consumer mortgage and other debts had not been tax deductible in Japan. Many economists have therefore suggested that differences in tax systems may explain the gap in the private saving ratios between Japan and countries like the United States where the reverse has been the case. However, empirical evidence does not support this proposition. The effects of the abolition of the so called "maru-yu" accounts in 1988 (the tax exemption system for interest income from small savings) has not yet resulted in a visible decline in the household saving ratio as a whole. - Public debt The "debt neutrality hypothesis" argues that the private sector anticipates the future tax burden associated with the government debt service and adjusts its saving behaviour accordingly. However, empirical research has tended to reject this hypothesis. In the case of Japan, several authors have tested the extent of public debt neutrality. Muto et al. (1987) point out that although fiscal neutrality is not consistent with Japanese data for the whole post-war period, especially after the mid-1960s when national debt was increasing, it is not -9-

20 entirely rejected either. The Economic Planning Agency (1995) concludes that although the government revenues did not affect the private consumption behaviour in the years , the hypothesis is not sufficiently supported. ii. Institutional factors The institutions and policies of the financial system may have had a positive impact on the level of household saving in Japan. The following relevant characteristics of the system can be pointed out: 1) the large number of offices of banks and various kinds of financial institutions including labour and agricultural co-operatives; 2) direct promotion of saving by banks through various form of non-price competition; and 3) corporate promotion of saving through payroll saving plans at rates substantially above the controlled rates paid by banks. - Bonus system The bonus system is one of the most frequently cited causes of the high Japanese saving ratio. The ratio of bonus income to total compensation is relatively high (about oneforth of annual income is paid in the form of a twice-yearly lump-sum bonus payment). If bonuses were viewed as "transitory income", the permanent-income hypothesis would suggest that bonuses would be saved and the system would contribute to a high household saving ratio. However, this argument is weakened by the fact that the bonus system has existed for a long time and bonuses have been become an integral and anticipated component of workers' compensation. - Working hours As leisure time and consumption are normally complements, long working hours may have a significant influence on the level of the household saving ratio. In fact the average number of hours worked in Japan is the highest among the OECD countries. The Japanese government has tried to reduce annual working hours to 1800 by fiscal year 1996 through the decision of the "Medium-term Economic Plan, 1992". Working hours declined from 2008 in 1991 to 1903 in iii. Cultural factors -10-

21 Many authors have cited "tradition", "culture", or "national character" as one explanation of the high Japanese household saving ratio. The common argument is that the proclivity of Japanese people to work hard and save more is due in large part to their Confucian heritage, which regards diligence and frugality as virtues. A student of Summers (1986) found that the saving ratio of Japanese-Americans is 5 percentage points higher than that of other ethnic groups in the United States. However, it would not be wise to place too much emphasis on this result since it is not clear to what extent the differences in income, education, and other factors were taken into account. The extremely high saving ratio of a set of east Asian economies is remarkable. Cultural factors which are common in Asian countries may work. - Extended families It is still common in Japan for young adults between the age of 18 and the time of marriage to live with their parents if they live in the same town. Even after their marriage, children often continue to live with their parents. Moreover, it is common that when parents become very old, or especially when one of them dies, they are "looked after" by their children. According to the "International Comparison Research on the Life and Concerns of the Aged People, 1991" by the Prime Minister's Office, the ratio of aged people who live with their married children was 41.9 per cent in Japan, a ratio that is substantially higher than that in the United States (3.7 per cent) and the United Kingdom (1.7 per cent). A country that is similar to Japan in this respect is Korea, where the relevant ratio was 42.8 per cent. The existence of elderly people within the young generation's household could reduce the latter's saving although, the negative effects may be offset when aged parents greatly assist the young in acquiring home-ownership. In "return" for taking care of parents, the child usually inherits the parents' real and financial assets, including their home. -11-

22 IV. THE OUTLOOK a. Influence of the ageing of the population The life-cycle hypothesis supposes that households save until retirement and then dissave. There are several studies by the OECD, the IMF and others which conclude that the private saving ratio would decline as a result of the ageing of the population since the retired proportion of the population increases. In contrast, Borsch-Supan (1995) shows that in the short run, until about the year 2010, demographic effects are more likely to increase rather than to decrease the supply of funds. This section looks at the factors which distinguish the pessimistic and the optimistic views as concerns likely outcome of the ageing of the population. i. Projection on the ageing of the population In Japan a very rapid ageing of the population is projected. According to the "Population Projections, 1992" by the Ministry of Health and Welfare, the Japanese dependency ratio of the aged population (defined as ratio of the population aged 65 and over to total population), is predicted to reach its peak of 28.4 per cent in the year The long-term evolution of birth rates, mortality rates and immigration will be highly uncertain. In fact, historical developments, therefore assumptions used in the "Population Projections" in the past, have changed significantly. However, the dependency ratio which is a sum of an aged dependency ratio and a young dependency ratio (defined as ratio of the population aged 0-14 to total population) will be less affected by those assumptions. The Ministry of Health and Welfare shows three alternative estimates based on lower, medium and higher assumption on the fertility ratio. In the case of a lower estimate, the dependency ratio will be even lower than that of medium and higher estimates, since a higher aged dependency ratio will be offset by a lower young dependency ratio. (Table 2 : Assumptions in population projections) Moreover, conventional definition of dependency ratio would be no longer effective. Yashiro et al. (1995) raises the question on the definition of the elderly. The Economic Planning Agency (1995) shows alternative aged dependency ratios. Firstly, the non-labour force population was excluded from the aged population. The ratio of non-workers to -12-

23 workers would be more effective compared with that of the non-working age population to the working-age population. This lowers the aged dependency ratio in 2025 to 19.1 per cent compared with that of 25.8 per cent by the standard definition. Secondly, "aged" population was defined as those whose life expectancy is less than certain years (12.0 years for men and 14.5 years for women which corresponds to life expectancy at 65 in 1955). Life expectancy at 65 has increased by 4.5 years for men and 6.2 years for women from 1955 to It is projected to increase until the year This definition further lowers the ratio to 15.1 per cent. (Chart 4 : Alternative aged dependency ratio) In Japan the "formal" retirement age has ranged between 55 and 60, which is low by international standards. However, most people who "formally" retire typically work some years at reduced wages or enter another occupation. In fact, the Japanese labour force participation ratio of the aged is one of the highest among the OECD countries. (Table 3 : Labour force participation ratios of the elderly) For the OECD countries as a whole, labour force participation ratios for men are currently around 20 percentage points higher than for women. The differentials vary across countries. In Japan such a differential is larger than other countries. According to the "Labour Force Survey", by the Management and Coordination Agency, the labour force participation ratio for men is 78.0 per cent on average, while this ratio for women is 50.3 per cent in If the labour force participation ratio for women increases, the overall participation ratio could be also raised. (Chart 5 : Labour force participation ratios for men and women) The demographic patterns for the next few decades are already largely known. However, developments of dependency ratio would be less certain. Taking into account the higher labour force participation ratio of the elderly and a further possible increase in participation ratio for women, the Japanese "effective" dependency ratio would not decline as much as the conventional definition suggests. ii. Effects on private saving -13-

24 Most of the earlier studies on life-cycle hypothesis have focused on cross-country analysis. It is found that countries with a large share of elderly tend to have a lower national saving ratio. This evidence could support the notion that the saving ratio would decline as the population ages. However, a growing body of evidence has put doubt on the validity of the simple form of the life-cycle hypothesis. Borsch-Supan (1995) argues that different birth cohorts experienced different earnings histories and different investment opportunities. Therefore, these different experiences may contribute more to the shape of the saving profiles than differences in age. Although, such a cohort effect is not convincing in Japan, partly due to the data availability (see below), compared with those observed in the United States where the saving by the baby boom generation is significant. In addition, looking at past changes in the demographic structure within countries, a different story could be suggested. Bosworth (1995) argues that the age composition of the population is not correlated with changes in the saving ratio over time. The increase in the number of aged persons has been largely offset by a decline in the number of children. If one emphasizes the dependency ratio, it has not increased in Japan and cannot explain the past fall in the saving ratio. Thus, past changes do not provide good evidence as to the impact of demographic change in the future. Moreover, the life-cycle hypothesis has been weakened by the fact that the elderly continue to save. The saving ratio of employee households whose head is aged 65 and over is 22.8 per cent according to the 1994 FIES. This is compared to the peak saving ratio shown by households with heads aged 50-54, which is 23.1 per cent. Although, it should be noted that many aged persons that are living with their children become hidden because of the Statistics Bureau's criterion of identifying the household head as the principal earner of the household. There is therefore a tendency for high income or large wealth-holding individuals, who can afford to save more, to form independent core families. The Economic Planning Agency (1995), following the method in Yashiro et al. (1995), examines the household age-saving profiles by adjusting the income and consumption expenditures of the elderly who depend on their children and who are economically inactive. The conclusion is that the life-cycle hypothesis is supported in its strict sense, in the case of Japanese elderly who have retired from the labour market. -14-

25 (Chart 6 : Age-saving profiles adjustment) In any event, the saving ratio would largely depend on the extent of how the elderly would continue working and saving. According to the "Survey on Employment Conditions of Older Persons, 1992" by the Ministry of Labor, although the primary reason why the elderly work is economic factor (compensation of living costs), it should be noted that the number of elderly people who think that working is healthy and who work in order to participate in society has increased. As concerns the saving motives of the elderly, bequest motive should be noted. As discussed earlier, wealth transfer between generations is significant. According to the "Public Opinion Survey on Saving, 1993", by the Central Council for Saving Promotion, 50.6 per cent of the households would bequeath assets to their children. The ratio of such household is even higher in the aged household. iii. Effects on public spending The ageing of the population will have a dramatic effect on public spending in Japan in the very near future. The Ministry of Health and Welfare analyses the benefits and the contribution of social securities based on certain assumptions. According to the "Welfare Vision in the 21st century", the ratio of social security benefits to national income, which was 16.3 per cent in 1993, would increase to somewhere between 26 1/2 per cent to 33 1/2 per cent in While the ratio of social security contribution to national income, which was 17.8 percent in 1993, would increase to between 26 to 34 per cent in These estimates vary according to the alternative assumptions on the social security scheme. The Japanese pension scheme was amended in 1994 and includes the following measures. First, the retirement age is currently 60, but will be gradually raised to 65 by the year Second, the contribution rate applied to wage income was raised from 14.5 per cent to 16.5 per cent in October 1994, will be further raised to per cent in October 1996, and then will be reviewed every five years. It should be noted that half of the contribution is paid by employers. In addition, bonuses have been subject to a one per cent contribution from April b. Adequacy of saving -15-

26 i. Public expenditure The ratio of Japanese public expenditure to GDP is lower than that in other OECD countries. Although public consumption on social securities would increase due to the ageing of the population, other consumption expenditures such as defense would remain lower. On the other hand, the notable feature of Japanese public expenditure is the higher ratio of public investment. In addition to both central and local governments, public enterprises play an important role in the construction of social capital. (Chart 7 : Public consumption and investment) It has been said that despite Japan's relatively high per capita income, Japanese capital formation, especially in social capital, has not proceeded well and the Japanese are not satisfied with their standard of living. Large numbers of highways, railways, airports and other facilities to be constructed in the coming decades are in the planning stage currently. If they will truly be necessary, further funds should be required. ii. Supply of capital for the world economy The ageing of the population might reduce the Japanese national saving through lower public saving rather than through private saving. This could contribute to a capital shortage for the world economy. However, the future supply of world capital depends on the amount of public dissaving among the OECD countries as a whole. In addition, it is also likely that most investment spending would be self-financed if developing and transition countries maintain a good overall policy mix. The role of financing capital demands falls not only Japan but on all countries. The international financial liberalisation in the 1980s is thought to have facilitated the large capital flows necessary to sustain saving/investment gaps in many countries. The correlation between national saving and investment found by Feldstein and Horioka (1980) has been falling over time. However, international capital diversification could be questioned. French and Poterba (1991) show that the domestic ownership shares of the world's largest stock markets are : 92.2 per cent in the United States, 95.7 per cent in Japan, 92 per cent in the United Kingdom, 79 per cent in Germany and 89.4 per cent in France. This is attributed to the result of investor choices, rather than institutional constraints. Investors in major industrial countries may still have a strong "home-asset preference". -16-

27 There are several uncertainties concerning adequacy of saving for the world economy. Further analyses are required and are beyond the scope of this paper. -17-

28 V. SUMMARY AND CONCLUDING REMARKS a. Summary The Japanese household saving ratio is still high by international standards. This has been a major source of funds for investment and hence economic growth. As concerns historical changes in the Japanese saving ratio trends, macroeconomic factors such as rates of economic growth and inflation may have been important ones in explaining the observed high saving ratio in the past. However, quantitative evidence is not always convincing because the causality is not clear-cut and there are measurement problems which are not negligible. The generally high level of the Japanese saving ratio compared with that in other countries would also be attributed to higher economic growth. It is thought that saving motives and structural factors such as government policies and institutional and cultural factors have played a relatively less important role in the determination of the saving ratio. In the coming years, based on the life-cycle hypothesis, the ageing of the population has been said to have an important effect on the saving ratio. However, the likely magnitude is not yet conclusive. The problem of an adequacy of savings is a further question. Domestic demands for consumption and investment expenditures would depend on the role that the government plays in society. World-wide capital demands would be subject to the developments in the other countries. b. Concluding remarks What is apparent is that analyses on saving trends are still largely inconclusive. However, this is not surprising either. - Uncertainties Measurement issues should be firstly acknowledged. In addition to the conceptual differences among countries, difficulties would arise because most definitions view savings as -18-

29 a residual concept, i.e., as income minus consumption. Smaller differentials in income and consumption may result in relatively larger ones in saving. Moreover, future saving trends would largely depend on the behaviour of people. For example, one important factor which distinguishes optimism and pessimism concerning the likely outcome due to the ageing of the population would be the labour force participation ratio of the elderly. Therefore, it would be more useful to discuss policy measures to raise labour force participation ratio rather than to estimate its developments. - Asian or ageing factors? The higher saving ratios are rather common features of the Asian economies associated with higher rates of economic growth although Asian economies themselves differ largely. While lower saving ratios are observed in the "aged" countries in the other areas. What is the primary factor to differentiate the saving profiles among the countries? Is it a macroeconomic development such as rate of economic growth? Is it a demographic factor such as age structure? Or are there any remaining factors typical to countries and regions? In this context, cross-country analysis and time-series analysis within the countries should be distinguished. - What is a matter of concern? Lower saving may cause higher interest rate because of excess demand for investment. However, as far as investment satisfies higher rate of return, higher interest rate itself should not always be a major concern. Even when savings are enough to finance investment, lower savings could lead to lower economic growth and living standards. However, this would not necessarily happen. What is more important is the reason why saving shortage occurs. For example, if the ageing of the population imposes further pension contribution and/or tax on domestic firms, this might induce them to invest abroad in order to seek lower costs. Such a distortion on the market by the institutional framework either intentionally or unintentionally should be a matter of concern. -19-

30 REFERENCES Blades, D. (1988), "Households saving ratio for Japan and other OECD countries", Paper presented at the EPA International Symposium. Borsch-Supan, A. (1995), "The impact of population ageing on savings, investment and growth in the OECD area", The paper presented at the OECD Forum for the Future, April Bosworth, B. (1995), "Prospects for saving and investment in industrial countries", The paper presented at the OECD Forum for The Future, April Dean, A. et al. (1989), "Saving trend and behaviour in OECD countries", OECD Working Papers No. 67. Economic Planning Agency (1982), "Annual Report on the Economy (fiscal 1982)" Economic Planning Agency (1988), "Annual Report on the National Life (fiscal 1988)" Economic Planning Agency (1995), "Annual Report on the Economy (fiscal 1995)" Feldstein, M. and C. Y. Horioka (1980), "Domestic saving and international capital flows", The Economic Journal, 90 (June). French, K. R. and J. M. Poterba (1991), "Investor diverticification and international equity markets", NBER Working Pears No Hayashi, F. (1986), "Why is Japan's saving rate so apparently high?" in S. Fisher (1986), NBER Macroeconomics Annual 1986, The MIT Press. Horioka, C. Y. (1988), Saving for housing purchase in Japan, Journal of the Japanese and international economies Horioka, C. Y. (1990), "Why Japan's household saving rate so high? a literature survey", Journal of the Japanese and international economies -20-

31 IMF (1995), "World economic outlook", May Kawasaki, K. (1990), "The saving behaviour of Japanese households", OECD Working Papers No. 73. Kojima, S. (1995), "The past and future patterns of savings and investment in Japan", Asia- Pacific Economic Review Vol. 1. No. 1. Muto, T. et al. (1987), "Kousai no churitsu meidai : riron to sono jisshou bunseki (Bond neutrality: Theory and its empirical studies)", Keizai bunseki (Economic Analysis) 106 Summers, L. (1986), in S. Fisher (1986), NBER Macroeconomics Annual 1986, The MIT Press. Takayama, N. et al. (1988), "Household asset holdings and saving rate in Japan", paper presented at the EPA International Symposium. Yashiro, et al. (1995), "Japan's economy in the year 2020", Nihon Keizai Shinbun-sya -21-

32 Table 1. Saving motives (a) (per cent of those giving each item as a major saving motive) For future consumption expenditure Children s educational expenses Children s marriage expenses Travel and other leisure expenses For purchase of real assets Land/housing related Purchase of consumer durables Precautionary saving Illness and other unexpected disaster Living expenses during old age Note: a. Figures are the percentage of persons interviewed for whom each motive is one of their top three motives for saving. A number of less important other motives are not shown. Therefore figures do not add up to 100. Source: Public Opinion Survey on Saving,1993, Central Council for Saving Promotion -22-

33 Table 2. Assumptions in population projections Time September 1992 December 1986 November 1981 November 1976 February 1975 Period 1991~ ~ ~ ~ ~2050 TFR (Total Fertility Rate) Middle High Low Middle High Low Middle High Low Middle High Low Middle High Low Life Expectancy at Birth Male Female Male Female Male Female Male Female Male Female Source: Population Projections for Japan, Institute of Population Problems, Ministry of Health and Welfare

34 Table 3. Labour force participation ratios of the elderly (%) Age 55~59 60~64 65~69 (Year) Male Female Male Female Male Female Japan (93) United States (93) United Kingdom (93) Germany (a) (92) France (93) Italy (91) Korea (90) Singapore (93) Note: a. Data apply to former West Germany only. Source: Year Book of Labour Statistics, ILO -24-

35 -25-

36 Notes: a. Investment and saving data are expressed in per cent of nominal GDP, in calendar year. b. I-S balance implies saving minus investment. c. For the purpose of simple exposition, net acquisition of land is excluded from investment. By the same reason, depreciation is included in saving but net capital transfer is not. d. The household sector includes unincorporated enterprises and private non-profit organizations helping households. Source: "Annual Report on National Accounts", Economic Planning Agency -26-

37 (%) Chart 2. Household saving-ratio developments Source: "Annual Report on National Accounts,1995", Economic Planning Agency. -27-

38 Sources: Composite Indexes (CI); "Indexes of Business Condition", Economic Planning Agency Consumer Sentiment Indexes (CSI); "Consumer Behavior Survey", Economic Planning Agency Average propensity to consume; "Family Income and Expenditure Survey", Management and Coordination Agency -28-

39 Chart 4. Alternative aged dependency ratio (a) Note: a. Alternative dependency ratios were estimated based on the data for population by "Population Projection for Japan, 1992", Institute of Population Problems, Ministry of Health and Welfare and for labour participation ratio by the Employment Policy Research Meeting, Ministry of Labour Source: "Annual Economic Report, 1995", Economic Planning Agency -29-

40 Chart 5. Labour force participation ratios for men and women Source: "Labour Force Survey,1993", Management and Coordination Agency -30-

41 Note: a. Figures are estimated based on the data by the "National Survey of Family Income and Expenditure,1989", Management and Coordination Agency and the "Comprehensive Survey of Living Condition of the People on Health and Welfare", Ministry of Health and Welfare Source: "Annual Economic Report, 1995", Economic Planning Agency -31-

42 Chart 7. Public consumption and investment (a) Notes: a. Figures are per cent of nominal GDP in 1992, except in Norway (in 1991). (%) b. Consumption expenditures for the society as a whole such as defence. c. Consumption expenditures that individual households benefit such as education and social security services. d. Average in the United States, Japan, Germany, France, Italy, the United Kingdom and Canada. e. Average in Sweden Finland, Denmark and Norway. Source: "National Accounts", OECD -32-