JAPAN: WILL IT KICK THE HIGH SAVINGS HABIT?

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00590R000200300001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 21
• Document Creation Date: December 22, 2016
• Document Release Date: January 18, 2011
• Sequence Number: 1
• Publication Date: May 1, 1985
• Content Type: REPORT

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Directorate of
Intelligence 25X1
Japan:
Will It Kick the
High Savings Habit?
EA 85-10098
May 1985
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Directorate of
Intelligence
Japan:
Will It Kick the
High Savings Habit?
This paper was prepared by
Office of East Asian Analysis. Comments and queries
are welcome and may be directed to the Chief,
Northeast Asia Divsion, OEA
Secret
EA 85-10098
May 1985
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Japan:
Will It Kick the
High Savings Habit?
Information available Japanese savings have struck a raw nerve in Tokyo. Even Japanese
as of 10 May 1985 proponents of fiscal stimulus-which is one possible response to US
was used in this report.
concerns-insist publicly that decisions affecting savings rates are purely
Summary Recent calls by US officials for reduction or better domestic utilization of
internal matters and not suitable topics for international debate.
about one-third of the country's current
account surplus stems from surplus savings, which is savings not used for
domestic investment, but they still consider saving a virtue not to be
tampered with lightly.
This paper explores the relationship between excess savings and current
account surpluses. It assesses the demographic, institutional, and policy
factors that will guide Japanese savings rates-and, indirectly, current
account trends-in coming years. The large share of wages distributed in
the form of bonuses, the underdeveloped social security and consumer
credit systems, and the availability of tax-free savings options are among
the institutional factors examined.
Most economists believe the household savings rate in Japan may fall
during the next two decades because of the aging of the population and
probable institutional changes, including the expanded availability of
consumer credit. Such a scenario-which implies declining current account
surpluses-is plausible, but we believe several caveats are in order:
? The savings-investment imbalance model on which the assessment hinges
has several shortcomings, including a high level of aggregation that blurs
the distinction between cyclical movements in the savings rate and
permanent levels.
? Policy options under consideration in Tokyo, including a near-certain
reduction in social security benefits, have the potential to cause house-
hold savings rates to rise once again.
? Even if the personal savings ratio falls by 2 to 3 percentage points by the
turn of the century, as is commonly expected, the government savings
ratio may rise by nearly as much if Prime Minister Nakasone makes
good on his pledge to eliminate new deficit-covering bond issues by 1990.
Under this scenario, the prospects for a sharp drop in Japan's national
savings rate seem to vanish and with them the likelihood of an end to pe-
rennial Japanese current account surpluses. In light of this, we believe
Tokyo's fiscal policy moves merit close attention in coming years.
Secret
EA 85-10098
May 1985
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High Japanese Savings: The Good News
Excess Savings Fuel Trade Friction: The Bad News
1
The Savings Half of the Excess Savings Equation
2
Japanese Households: Extraordinary Savers
3
Demographic Factors: Improving With Age?
3
Traditional Frugality: Can It Survive the Younger Generation?
4
Institutional Factors: Key to High Savings?
5
Social Security
8
Retirement Age
9
Economic Variables: Of Declining Importance?
9
Overall Prospects for Personal Savings
10
Government Savings: Growing for the Rest of the Century?
10
Corporate Savings: Profit Driven
11
Putting the Pieces Together: The National Savings Rate
12
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Deciphering Savings
Definitions and Data
Economists define savings as current income not
consumed in the year it was received. Statisticians
assume households consume durable goods such as
automobiles and TVs during the year they were
bought, whereas the consumption of a newly pur-
chased house is spread over a number of years.
Personal savings data thus reflect additions tofinan-
cial holdings and fixed assets (mainly houses) less
increases in financial liabilities.
The Annual Report on Family Income and Expendi-
ture Survey, which contains extensive data on Japa-
nese savings, calculates savings in such a manner.
Although this survey is sent to over 8,000 house-
holds, some economists allege the results are biased
by the low response rate from low-income families.
Fewer households are surveyed in the annual Public
Opinion Poll on Savings published by the Bank of
Japan, but this survey is unique in asking individuals
why they save.
The national income accounts put out by Japan's
Economic Planning Agency (EPA) provide data on
savings that cover all households as well as the
corporate and government sectors (see figure 1). The
EPA calculates the savings rate as a residual, what
remains of income after consumption, and thus the
figures are affected by any errors in the vast con-
sumption category. Although the economic definition
of savings is the same for corporations and the
government as it is for households, there is no neat
financial counterpart to the first two sectors' savings.
Figure 1
Japan: Savings Ratio, by Sector,
1970-82
0 1970 75 80
The rate of household saving is calculated as the
ratio of aggregate saving to aggregate disposable
income (that is, income net of income taxes). In
analyzing the national accounts, the economist em-
ploys a second ratio: the ratio of household savings to
aggregate GNP.
vwcuuucui
Corporate
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Japan:
Will It Kick the
High Savings Habit?
High Japanese Savings:
The Good News
In the high-growth era of the 1960s, Japan clearly
benefited from the people's willingness to save-that
is, to forgo consumption-at a much higher rate than'
in the United States, West Germany, and the other
non-Communist industrial powers (see figure 2). High
savings helped fund immense investment require-
ments and prevented the inflation and balance-of-
payments problems normally associated with rapid
economic expansion.
When the first oil crisis struck Japan in 1973-74,
GNP growth and investment outlays declined, but
savings failed to drop commensurately (see figure 3).
Officials in Tokyo have claimed since then that
Japanese savings not used at home are not wasted but
are available for investment abroad.
Excess Savings Fuel Trade Friction:
The Bad News
Despite Tokyo's attempts to put surplus savings in a
positive light, most economists have concluded that
high Japanese savings are not the virtue they once
were. Economic theory asserts that when savings
exceed investment, domestic demand will fall short of
its potential. Weak domestic demand, in turn, will
depress import requirements and foster export drives
by encouraging firms to focus on overseas markets.
The push to export makes both an expansion of trade
and current account surpluses far more likely. These
economic relationships are expressed in terms of
national income accounting as an equation that shows
savings less investment as equal to the current account
Figure 2
Selected Countries: Gross National
Savings Rates, 1970-82
0 1970
surplus. Japanese national income data in fact gener-
ally reflect this relationship, although the statistical
discrepancies involved sometimes are quite large (see
figure 4).
This reasoning leads many economists to describe
persistent Japanese current account surpluses as fun-
damentally a result of excess savings. In the United
States, the Japan Economic Institute, Federal Re-
serve Bank officials, and numerous academics have
come to this conclusion. In Japan, the Economic
Planning Agency subscribes to the excess savings
thesis
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Figure 3
Japan: National Savings and
Investment Ratios, 1970-82
Investment
30 1970
Figure 4
Japan: Excess Savings and Current
Account Balances, 1970-84 0
Current account
balance
IL
Savings minus
investment
-2 1970
Publicly, moreover, Finance officials quickly
rebuffed recent suggestions by Secretary of State
Shultz and Federal Reserve Board chairman Volcker
that Japan alter policies affecting savings and invest-
ment.
We also perceive some problems with drawing an
oversimplified picture of the connection between the
current account surplus and excess savings. In partic-
ular, the aggregation involved in savings statistics
masks important distinctions between the savings
generated by business or economic cycles and those
generated by the structure of the economy. Cyclical,
unlike structural, excess savings are not the cause of
persistent current account surpluses. The weakness of
the yen against the dollar, abnormally high interest
rates, and depressed raw material prices during recent
years have substantially inflated the cyclical segment
of the savings-investment imbalance. The Economic
Planning Agency (EPA) estimates these factors, along
with differences in the business cycle in Japan and the
United States, accounted for $11 billion of the coun-
try's current account surplus in fiscal year 1983 (April
1983-March 1984). The EPA believes that structural
factors such as ingrained frugality were responsible
for an almost permanent level of excess savings that
accounted for the remaining $13 billion of the surplus.
The Savings Half of the
Excess Savings Equation
Despite the risk of oversimplification, we believe the
theoretical model that relates excess savings and the
current account surplus is a valid analytical tool to
assess long-term trends in Japan's current account. To
use it in this manner, the equation must be broken
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Four-Sector Investment
and Savings Model
Table 1 (Billion US $)
Japan: Sectoral Financial Flows, 1982
In addition to breaking down the savings/investment
equation into its two component parts, detailing the
sectors in which each occurs improves analysis of the
excess savings problem. Traditionally, the domestic
economy is divided into corporate, household, and
government sectors. Economic interaction with non-
residents, involving imports or exports of goods,
services, or financial assets, is treated as occuring in
the foreign sector.
Savings and investment need not balance within any
one sector but must balance across sectors. Given the
diverse motives for investing and saving, such balance
is by no means assured when discussions are confined
to the domestic economy. Financial intermediaries-
primarily banks-strive to lend all available savings
to investors, changing interest rates if necessary to
induce individuals and companies to deposit or bor-
row more. Even this may be insufficient to achieve the
desired result of using all savings domestically. In
this case, the foreign sector will come into the picture
(see table 1). For example, if savings are in excess of
domestic needs, the surplus will be shipped abroad in
the form of capital outflows. A current account
surplus will be the counterpart to these financial
flows.
down into its component parts, namely savings and
investment. Examination of investment prospects is
beyond the scope of this paper, but most experts
foresee a slight decline in Japanese corporate invest-
ment as a percentage of GNP during the next decade
as the economy shifts away from capital-intensive
manufacturing and into service activities. We believe
the ratio of government investment to GNP also will
decline because fiscal policy probably will remain
tight. Although these trends would raise the amount
of excess savings, many economists expect significant
declines in the savings rate over the decade and thus,
a net reduction in trade surpluses. We believe, howev-
er, that this judgment puts too much emphasis on
developments in the household sector while ignoring
important trends in the corporate and government
sectors: thus it may prove off the mark.
Household
187
76
111
Corporate
102
172
-70
Government
37
74
-37
a Balance does not add to zero because of statistical discrepancies.
b Receipt of foreign funds and goods.
c Disbursement of funds and goods to foreigners.
Japanese Households: Extraordinary Savers
According to Japan's Economic Planning Agency, the
savings rate of the household sector should drop from
19 percent of GDP in 1980 to 16 to 17 percent by
2000. Other reputable economists who have analyzed
the Japanese savings scene anticipate a similar de-
cline.
This fairly wide consensus about future trends masks
sharp disagreements among economists about the
factors responsible for Japan's past savings record (see 25X1
figure 5). In the following sections we will analyze
these cultural, institutional, macroeconomic, and de-
mographic factors and assess how they could change
in the coming years. We will also examine how policy
moves by Tokyo, especially in the social security
program, could affect savings motives and the course
of personal savings.
Demographic Factors: Improving With Age?
The rapid aging of the Japanese population is the
prime ingredient in all forecasts of a decline in the
personal savings rate. The widely accepted life-cycle
theory of savings contends that elderly people liqui-
date their nest eggs to make ends meet. The theory
appears applicable, although only loosely, to Japan. In
each of the last 10 years, Japanese over 65 as a group
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Figure 5
Japan: Explanations for High
Personal Savings in Postwar Era
Legend
o Viewed as valid explanation for high level of Japanese household savings
Argument accepted but only with major qualifications
i. Considered inappropriate explanation
C
E
0
Analyst
N
C
N
--
?C
0
'
(date of research)
7
O iC
C)
R C
0
?9
t3 O
o
O
O O
~
O O
Sato (1980-84)
0
O
0
0
Blumenthal (1970)
O
O
O
Mizoguchi (1970)
O
O
O
O
0
Shinohara (1959)
O
O
O
O
O
Komatsu (1978)
O
Komiya (1966)
O
O
0
O
Economic Planning
Agency (1983-84)
0
0
0
Japan Economic
0
0
Institute (1982)
have not drawn down their savings, but.they have
saved much less of their income than any other adult
age group except those under 25. As long as this
pattern continues, the increase in the over-65 age
group-projected to grow from 9.1 percent of the
population in 1980 to an estimated 15 percent in
2000-should result in a reduction of the savings rate.
The Health and Welfare Ministry has calculated that
on average each household-of which there were 34
million in 1980-will be saving $20 less annually by
2000 than would have been the case if Japan's
population kept the age distribution evident in 1965.
Other probable demographic changes-such as in-
creased life expectancy and decreased family size-
have less significant implications for savings. Future
shifts in these variables, moreover, probably will be
minor compared with those that have already taken
place:
? Life expectancy in postwar Japan has lengthened
dramatically and by 1982 was the highest in the
world. Past increases in longevity probably spurred
savings of the working age population to meet the
expanded need for retirement income.
? The average number of children per family has
decreased for several decades. With fewer children,
parents have put away less money for education and
marriage expenses, depressing the personal savings
ratio in the process. Smaller families also have
contributed literally to more room for people-the
floorspace per individual has doubled over the last
25 years. This has encouraged higher spending on
furniture and other consumer durables, further re-
ducing savings.
Their share had dropped to 44 percent by 1982.
By injecting new uncertainty and insecurity into the
lives of the elderly, however, other recent demograph-
ic changes are pushing savings up somewhat. In
particular, changes in living patterns probably are
increasing the perceived need for precautionary sav-
ings. For example, three-generation households ac-
counted for 58 percent of all households in 1967.
Traditional Frugality: Can It Survive the Younger
Generation?
Japanese social traditions and Buddhist religious
teachings place a high value on frugality. In our view,
many economists have framed their analyses of Japa-
nese savings too narrowly and in the process have
underestimated the importance of such cultural fac-
tors. Economists have generally hesitated to give
much weight to cultural factors because prewar data
on savings is not conclusive. Savings data first con-
structed for the late 1800s and early 1900s suggested
that net private savings were generally below 10
percent of GNP and, on an annual basis, frequently
negative. Although such results suggest high savings
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is a relatively recent phenomenon, not a traditional
virtue, the original series on savings was derived
indirectly from investment data and, according to
many researchers, was flawed by estimation errors
and methodological shortcomings. When the series
was recomputed using different depreciation assump-
tions, calculations showed private savings were consis-
tently above 10 percent of GNP after 1900. More-
over, statistics from this period of relative poverty
could not accurately measure attitudes toward frugal-
ity, because there was little to save, however strong
the desire. In short, we believe the link between
Table 2
Japan: Motives Most Often Cited
for Personal Savings
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cultural values and high savings has merit.
Many observers believe that, like the effect of genera-
tional change in other societies, the younger Japanese
generation is becoming less financially cautious and is
abandoning such notions as postponement of present
gratification and sacrifice for the good of the family.
As young adults devote more time to leisure activities
and develop their own values, these analysts foresee
consumption rising as a percent of personal income.
The Japanese, however, have thus far been able to
raise both consumption and savings at a rapid rate
because of the extraordinary growth of the economy.
The Economist in 1983 pointed out that the Japanese
already are "almost as rabid consumers as Ameri-
cans"-while maintaining their impressive savings
rate.
In fact, annual savings surveys by the Bank of Japan
provide some evidence that generational differences
may not be as great as commonly assumed. For
example, only 2.4 percent of those surveyed in 1983
said it was more important to enjoy life by boosting
consumption than to save. In 1966 the comparable
figure was 5.1 percent. Another survey, which asked
young single women why they worked, also suggests
high savings will not die with the younger generation.
Nearly half of those surveyed indicated they worked
largely to earn money to save.
Illness or accident
36.9
42.2
36.1
34.4
Children's education
16.9
16.4
18.3
18.3
House purchase
16.8
13.9
15.4
12.3
Retirement income
12.0
13.0
11.3
15.5
8.9
7.7
5.9
6.5
8.5
6.8
13.0
13.0
times the real effect, of these individual items)
Institutional Factors: Key to High Savings?
Although economists usually play down the cultural
underpinnings of Japanese savings, they often high-
light unique institutional arrangements that help ex-
plain why Japanese households save more than their
counterparts in other industrialized countries:
? The large share of wages distributed in the form of
bonuses, which gives people a large lump sum that
they tend to bank rather than spend.
? The underdeveloped social security and consumer
credit systems.
? The availability of tax-free savings options.
Analysts differ on the relative importance, and some-
We believe institutional factors create a favorable
environment for savings. We do not, however, sub-
scribe to any of the popular, one-factor, institutional
explanations for high Japanese savings. In our judg-
ment, such theories-which give all the credit for the
country's high savings rate either to the social security
system, the bonus system, or tax incentives-fail to
explain adequately saving trends during the past 20
years.
Tax Incentives. After World War II, the Japanese
In general, Japanese seem to believe saving is still Government adopted various tax incentives to encour-
important, although perhaps not as much of an imper- age savings. These included a tax exemption on
ative as it once was. They continue to have a strong capital gains from sales of securities, low property
desire to save in order to pay for their children's taxes, and a zero-to-low tax on interest and dividend
education, to buy houses, and to provide for retire-
ment (see table 2). Generational changes, we con-
clude, should have only a mildly depressive effect on
the savings rate.
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Figure 6
Japan: Tax-Free Savings Options
for Individuals a
Legend
0 Postal savings account
O Small savings accounts in banks
O Government bond holdings
O Postal installment savings for housing
Wage earner's property accumulation holdings
1960
1965
1970
1975
second requirement. Moreover, although the amount
of money that can go into tax-free accounts is capped,
these limits are so high as to have affected only a
small number of households and, in any event, are
easy to evade.
Many economists point out that incentives to increase
savings sometimes can have perverse effects. In the-
ory, a high yield on savings lowers the cost of future
consumption compared with present consumption and
thereby spurs higher savings. But an individual can
meet lifetime savings goals with smaller annual incre-
ments when the interest paid on savings rises. A
recent IMF study concluded that the relative strength
of these two opposing forces depends on the age
distribution of the population and the distribution of
financial assets among age groups. The authors of the
study ascribe the recent fall in the US personal
savings rate-which coincided with introduction of
such savings incentives as individual retirement ac-
counts-to the large share of assets held by the
elderly, who are apt to boost consumption when yields
increase. We suspect Japanese assets are similarly
concentrated among the elderly, but data limitations
prevent a more definitive statement about parallels
income. The amount each individual could place in
tax-free postal savings accounts, for example, was
boosted from its wartime level of 700,000 yen to
3 million yen in 1947, about $8,000 at the prevailing
exchange rate. Since then, Tokyo has expanded the
list of accounts qualifying for tax-free status and the
limits on individual holdings (see figure 6). Every
Japanese is now entitled to hold 14.5 million yen
($58,000) in tax-free accounts. Such accounts totaled
$900 billion, or 60 percent of all private savings, in
early 1984.
Observers usually praise Japan's tax incentives for
meeting the key requirements of a rational savings
promotion program. Tax policy specialists have ar-
gued that to increase the rewards for saving, a
government must (1) avoid benefit caps that remove
incentives for high-income groups to save and (2)
discourage borrowing as well as encourage savings. By
not permitting deductions for interest payment on
consumer debt,' the Japanese tax system fulfills the
with the US experience
The handful of economists who have examined the
relationship between Japan's tax laws and savings
performance find little evidence to support the conten-
tion that the country's generous savings incentives
work. They have concluded that tax laws do not seem
to be important in shaping the average wage earner's
saving behavior. Although their findings indicate that
conventional wisdom overstates the importance of tax
incentives, we do not think the incentives should be
dismissed as totally ineffective.
The debate about the efficacy of tax incentives is far
from academic. Since the late 1970s, the Japanese
Government has periodically discussed tightening re-
strictions on, and possibly eliminating, savings incen-
tives. Tokyo has tried for years to end the widespread
practice of holding multiple or anonymous postal
savings accounts. Since January, individuals wishing
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to open tax-free savings accounts have been required
to present identification. In 1984 the Finance Minis-
try recommended more drastic measures, including
imposition of a uniformly low tax rate on all savings
accounts. This last option would have added $2 billion
to government coffers if the tax rate were set at 5
percent, but Liberal Democratic Party officials killed
the proposal.
the 1980s, the rate of return on such instruments
before taxes probably will climb and perhaps offset
Despite the failure of recent attempts to pare tax-free
savings, we believe future movement on this front is
likely. If incentives are cut back, savings in the upper
income brackets probably will decline. But reduced
yields may boost the savings rate among the elderly.
Neither we nor the Japanese, however, are well
positioned to assess such trends at this point because
of the ongoing liberalization of Japan's financial
system, which complicates analysis of interest rate
movements. Since 1981, financial institutions have
begun to offer individuals high-yielding instruments.
As financial liberalization gains momentum through
increases in the tax burden on interest income.
Bonuses. Japanese workers typically save half of their
semiannual bonuses, which each year normally
amount to two months' salary. Several economists
have pointed to the large share of wages paid in the
form of bonuses as a key element in high Japanese
savings. Economic theory provides some support for
this idea. It contends individuals base their consump-
tion on income they believe is dependable and predict-
able (monthly salaries) rather than on transitory in-
come (bonuses), which is therefore initially saved.
Many economists doubt that the Japanese really view
bonuses as transitory and unpredictable income. Bo-
nus income has been less volatile than wage income
since 1975, adding credence to this skepticism. The
share of disposable income received in the form of
bonuses, moreover, has grown and shrunk indepen-
dently of savings since 1976 (see figure 7). Efforts to
test the savings/bonus linkage with econometric
methods suggest an accurate description of this rela-
tionship lies somewhere between these extreme posi-
tions. Analysis of the linkage in 1984 found that at
most 3 percentage points of Japan's savings rate can
Figure 7
Japan: Savings and Temporary
Income, 1965-83
Bonus income
Savings
I I I I I I I I I I I I I I I I l
1965 70 75 80
Semiannual bargaining sessions between corporate
treasurers and union officials determine the share of
income dispensed via bonuses. After a sharp rise in
the 1960s and early 1970s, the ratio of temporary
income (bonuses) to disposable income has remained
quite stable-staying between 21 percent and 23
percent-since 1975, and we suspect the ratio will not
move up or down by more than 1 percentage point
during the next decade. Using the econometric formu-
la derived from the 1984 test of the savings-bonus
linkage, a shift of this magnitude would imply a
change in Japan's savings rate of only 0.1 percentage
point.
Consumer Credit. Some observers have suggested
that the Japanese save because of the difficulty of
buying on credit, a legacy of the country's postwar
preoccupation with industrial reconstruction. In the
1950s and 1960s, commercial banks were busy look-
ing after the needs of corporate loan clients and had
be attributed to the effect of bonuses
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little desire to extend personal loans. The latter
were-and still are-considered risky because con-
cerns about privacy made it difficult to collect and
exchange personal credit histories. As corporate fi-
nancing needs diminished in the 1970s, banks took an
interest in consumer business. Personal loans shot up
from 0.3 percent of the loan portfolios of major
commercial banks in 1965 to 9 percent in 1980.
Housing loans account for almost all of the increase.
Banks continue to shy away from making general
consumer loans. Sarakin firms-essentially legal loan
sharks-have traditionally provided this service. Pub-
lic and political sentiment against these firms has,
however, intensified in recent years as hundreds of
suicides have been blamed on their strongarm tactics.
In an effort to rein in the sarakin, the Ministry of
Finance in 1978 forbade Japanese banks from extend-
ing loans to these companies and in 1983 reduced the
maximum lending rate charged by sarakin from 110
percent to 73 percent per annum. These changes have
bankrupted many smaller sarakin, making consumer
finance even scarcer.
Over the next decade consumer credit should be more
available even if the sarakin continue to scale down
their operations. The Finance Ministry last year gave
small credit associations and labor cooperatives per-
mission to undertake consumer lending and recom-
mended that commercial banks become more active in
this field. More important, government officials have
said they may draft legislation to encourage greater
competition in consumer finance and to improve
protection for borrowers.
Better access to consumer finance should depress
precautionary savings not associated with any particu-
lar future consumption. The number of Japanese who
said they saved primarily to ensure "peace of mind"
drifted down during the 1970s, perhaps in response to
improved consumer credit options (see table 2). Survey
results on questions about the savings/income ratio
the Japanese believed they should maintain show a
similar pattern of decline punctuated by temporary
savings spurts whenever external economic shocks
struck home (see figure 8). These trends suggest to us
that precautionary savings in Japan are influenced by
economic prospects as well as by the availability of
Figure 8
Japan: Personal Savings Targets,
1966-84
1 1
1966
75
80
credit. Similarly, other factors-including the lack of
widespread legal precedent for individuals to seek
redress for costly injuries resulting from negligence,
and the perceived inevitability of natural disasters-
are certain to lead the Japanese to continue to set
aside money for peace of mind. Thus the reduction in
the savings rate associated with an expansion of
consumer credit may not be as large as is commonly
assumed.
Social Security. Nearly every economist who ana-
lyzes Japanese household savings examines the possi-
ble causal relationship between the country's high
savings ratio and the small share of GNP devoted to
social security. Those who see such a relationship
consider the benefit levels in state-run pension
schemes low and claim this forces young Japanese to
amass huge amounts of savings to provide retirement
income. These economists claim that the need to save
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for retirement while young will force up the national
household savings ratio. Other economists, however,
insist that benefit levels of the current system are not
underdeveloped and therefore do not act, in effect, to
boost the savings rate.
We believe both arguments contain some truth. Not-
withstanding the growth in the number of senior
citizens, Japan's population is comparatively young.
This is the key reason, in our view, for the small share
of social security in national income. In fact, on paper,
benefit levels of Japan's old age pensions are more
generous than those in the West. In 1983, for exam-
ple, a Japanese retiring at the age of 60, after
contributing to the government plan for 30 years,
could receive benefits equal to 44.2 percent of his
previous year's earnings. In West Germany, the Unit-
ed States, and the United Kingdom, men got an
equivalent amount only after reaching age 65. The
Economist points out, however, that such comparisons
are somewhat misleading. The public employees' pen-
sion plan that covers almost half of all Japanese
workers was not established until 1961, so no one in
that plan yet qualifies for the high benefit levels
mentioned.
Although some foreign observers continue to chastise
the Japanese Government for its underdeveloped so-
cial security system, officials in Tokyo worry that the
system could exhaust its reserves by the turn of the
century if not reformed. The Health and Welfare
Ministry has proposed boosting contributions and
capping benefits. The Diet passed these measures in
late April. Although such action may boost the
savings rate of future generations, most adults appear
to have anticipated such measures, and we doubt the
changes will soon alter the savings rate much. Fears
about possible changes explain the recent resurgence
in the "saving for old age" motive. Annual polls reveal
the percent of respondents who said they saved pri-
marily for old age climbed from 12 percent in 1970 to
15.5 percent last year, even though social security
benefits improved substantially during that period.
feature involves the traditional gap between the age at
which large firms force employees to retire-55-and
the age at which they are eligible for a state pension-
60. Firms generally give employees a lump-sum pay-
ment to help tide them over this period, but individ-
uals also are compelled to take low-paying jobs at
smaller companies and to liquidate savings to make
ends meet. For the Japanese, the need to fill this
retirement "gap" has made target levels of lifetime
savings relatively high.
Some larger companies now allow employees to re-
main on the job until they are 60. If this practice
spreads, it could lower target savings levels. Its effect
may not be as great as first appears, however, because
planned changes in social security annuities would
delay the onset of full benefits until age 65. Even once
these changes are implemented, partial payments will
still begin at age 60, allowing savings targets to fall
Retirement Age. We believe economists' standard
emphasis on social security slights a feature of the
Japanese employment system that has profound ef-
fects on the level of savings for old age income. This
somewhat.
Economic Variables: Of Declining Importance?
In the 1980s, Japan's economy appears to be on a
steady course, making it unlikely that random eco-
nomic shocks will affect savings rates much. Inflation
and unemployment have stayed below 3 percent for
several years, and GNP growth is running at 3 to 5
percent annually. The ease with which the economy
digested the 1979-80 round of oil price hikes makes us
somewhat optimistic that stable noninflationary eco-
nomic growth can be maintained unless an extremely
severe external economic shock strikes. The volatility
of the yen may prove a major exception to the
stability scenario. Even in this case, however, the
impact would be greater on the corporate than on the
household sector because imports of raw materials-
used by businesses-exceed those of consumer
products.
Although not expected to be particularly important in
guiding savings in the future, economic variables-
particularly changes in inflation and disposable in-
come-figure prominently in past saving rate trends.
The sharp rise in personal savings in 1973 and the
subsequent gradual decline can be partly explained by
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movements of these two specific factors as Japan
adjusted to the 1973-74 oil price crisis and its after-
math.
The behavior of the Japanese in the 1970s demon-
strates that their inclination to save can be directly
affected by their ability-or failure-to anticipate
inflationary spirals. Most analysts view the jump in
inflation in the mid-1970s-from less than 5 percent
in 1972 to nearly 25 percent two years later-as a
prime contributor to an upswing in the savings rate.
Because the inflation was unexpected, individuals had
failed to shift their savings into assets, such as real
estate, capable of retaining their value in the face of
price increases. The spending power of their nest eggs
dwindled, providing an impetus for a one-shot savings
spurt to bring holdings back to the desired level.
Tokyo's subsequent policies to check inflation have
been successful, facilitating a return to lower savings
rates.
Personal savings rates have ebbed and flowed in
reaction to changes in disposable income as well.
Healthy increases in real per capita income in the
early 1970s allowed the Japanese to boost consump-
tion and savings simultaneously. But growth in real
disposable income slackened following the first oil
crisis as employers moderated wage increases and the
government abandoned indexation of income taxes.
To maintain improved living standards in the face of
income restraints, Japanese households reduced their
savings rates. Income trends obviously were not the
only factor behind the decadelong decline in the
savings rate. Institutional changes-such as increased
consumer credit and later retirement-also played a
role. Moreover, we believe the growing self-confidence
of the Japanese increasingly will bring them to see
economic reverses as temporary and to behave more
calmly in maintaining consumption levels.
Overall Prospects for Personal Savings
The "high saver" label for Japanese has remained
appropriate throughout the postwar era, but the mo-
tives for household savings have changed apace with
changes in the economic and institutional environ-
ment. Economic factors played a prominent role in
forcing personal savings rates down during the latter
half of the 1970s. We believe demographic factors
will become more important in coming years, with the
aging of the population pushing the savings rate down.
Most anticipated institutional changes, including im-
proved access to consumer credit and later retirement,
should further reduce savings rates. But other factors,
particularly reform of the social security system, hold
the potential for reversing this trend. A savings ratio
decline of 2 to 3 percentage points between now and
the turn of the century is quite likely, but it certainly
is not the only possible outcome. And even if this
projected decline occurs, Japanese households will
remain high savers largely because of society's em-
phasis on personal and familial responsibility that is
central to the social, cultural, and historical roots of
the nation.
Government Savings: Growing for the
Rest of the Century?
Following the first oil crisis the Japanese Government
switched from being a net lender of funds to being a
net borrower. In other words, it began to run budget
deficits. The central government deficit peaked at 6
percent of GNP in 1979. In the same year the deficit
of the general government sector, which also includes
local governments and the social security fund,
reached 4.4 percent of GNP. The deficit in the more-
inclusive general government sector usually is smaller
than its central government counterpart because the
social security system traditionally runs a substantial
surplus.
Despite these deficits, the government managed to
chalk up positive savings rates throughout the 1970s
(see figure 9). The distinction between current and
total expenditures is central to the apparent contra-
diction between budget deficits and positive savings.
When calculating budget balances, total government
spending is subtracted from total income. But when
calculating savings, only noninvestment expenditures
are considered. Japanese public works spending, 15
percent of central government outlays, is thus not
counted and the result is a positive government sav-
ings rate
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Figure 9
Japan: Government Savings and the
Budget Deficit, 1970-82
Net lending
or borrowing
-6 1970
Fully funded systems, unlike the pay-as-you-go pro-
grams of the United States and West Germany,
earmark the contributions (and interest on those
contributions) for retirement benefits for the genera-
tion making the payments. Tokyo, however, has in-
vested accumulated reserves in infrastructure proj-
ects, which often yield negative real rates of return.
Thus, the ability to fund future benefits has decreased
while potential benefit levels have been increasing.
As no change in social security investment practices
appears imminent, Tokyo faces a dilemma: either the
present system will have to be made less generous or
the government will have to subsidize the system more
heavily in the future. Legislation to trim benefits
somewhat has already been passed. Implementation
of the new measures will reduce the need for, but will
not rule out, increased official subsidization of the
system. A decrease in government savings attribut-
able to social security responsibilities thus remains a
possibility.
In recent years, Japanese policymakers have been
intent on sticking to austere budgets to contain the
deficits. Prime Minister Nakasone has pledged to
eliminate new deficit-covering bond issues by 1990.
Realization of this goal implies that government
savings as a share of GNP will rise, perhaps by as
much as 2 percentage points, through the end of this
decade. Typical business cycle developments, such as
a recession-induced fall in tax revenues or an increase
in outlays for unemployment benefits, are unlikely to
derail Tokyo's plan. Estimates by the OECD indicate
that cyclical movements in Japan's budget in recent
years have been only about one-tenth as severe as
dislocations in other countries)
The government's growing responsibilities for social
security pose one threat to the decreasing deficit/
increasing savings scenario. Officials in Tokyo have
made dire predictions about the future of the social
security system. Some economic observers blame
"half-prudent" government policies for these poor
prospects because Japan's fully funded system theo-
retically should be immune to demographic changes.
The other threat to a rising savings scenario is the
unhappiness of LDP leaders with tight fiscal policies.
Party faction leader Toshio Komoto and prime-
ministerial hopeful Kiichi Miyazawa have repeatedly
called for increased public spending. They argue that
stimulating domestic demand might help ease trade
friction. This argument has grown in importance as
US concern about the Japanese trade surplus has
mounted. Stimulative action by Tokyo might also
benefit construction firms, a key constituency of
proponents of pump priming measures.
Japanese corporate savings performance depends
largely on profitability (see figure 10). For example,
the ratio of corporate savings to GNP tumbled in
1975 as raw material price hikes and large wage
demands slashed profits. The corporate savings ratio
has been relatively stable since then, as inflation has
subsided. Successful efforts to reduce the raw materi-
al requirements per unit of output also played a part
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Figure 10
Japan: Corporate Savings and
Profitability Ratios, 1974-82
Savings as
a share of
GNP
Ratio of current
profit to total
liabilities and
I I I I I 1
0 1974 75 80
Putting the Pieces Together:
The National Savings Rate
The contradictory trends in personal and government
savings rates suggest that predictions of a falling
national savings rate are premature. Moreover, pro-
jecting a national savings rate based on estimates of
Japan's household, government, and corporate savings
rates is more than a simple additive operation. Econo-
mists have long recognized that corporate and house-
hold savings affect each other and that there are
trade-offs between these savings rates and govern-
ment savings as well:
? A jump in the national wage scale frequently in-
volves a trade-off between corporate and private
savings. If wage increases exceed productivity gains,
profits will suffer and corporate savings will fall.
But personal savings may increase if the resulting
income gain was unexpected.
? An increase in taxes, which by itself boosts govern-
ment savings, may in its wake cut into personal or
in the improved profits and increased savings during
the late 1970s. Despite these efforts, dramatic
changes in Japan's terms of trade still hold the
potential for pushing around the corporate savings
rate. Specifically, continued softness in world oil
markets could brighten corporate profit and savings
pictures. On the other hand, a sharp appreciation of
the yen-although of benefit to some sectors, such as
petrochemicals-could shave savings rates.
Removal of Japanese barriers to imports is likely to
impinge on profits and savings in the future, although
probably only slightly. The protection afforded do-
mestic industries by current barriers may have im-
proved the industries' profitability, but we believe the
fierce competition among domestic firms makes it
unlikely such profits are very large. Thus, the removal
of trade barriers through import liberalization proba-
bly will have a minimal impact on the savings rate
compared with the potential fallout from sharp
changes in the terms of trade and exchange rates.
corporate savings rates.
We believe it is too early to predict how these
relationships will affect future Japanese savings rates.
Prime Minister Nakasone has promised that govern-
ment budget deficits can be eliminated without tax
increases, but political leaders within his own party
are now freely advocating tax reform. We believe tax
reform may prove a precursor of tax increases. If
income taxes are raised, personal savings as a share of
GNP probably will decline even further than the 2 to
3 percentage points mentioned above. In this case,
despite the increase in government saving, the nation-
al savings rate probably will decrease. If it falls
enough, the estimated 1 to 2 percent of GNP structur-
al saving/investment imbalance may be erased. If
such trade-offs do not occur or if consumption rather
than income is taxed, however, the prospects for a
sharp drop in Japanese savings rates seem to vanish
and with them the likelihood of an end to perennial
Japanese current account surpluses. In light of this,
we believe Tokyo's fiscal policy moves merit close
attention in coming years.
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