THE DETERMINANTS OF JAPAN'S SAVING RATE: THE IMPACT …

The Economic Studies QuarterlyVol. 42, No. 3, September 1991

THE DETERMINANTS OF JAPAN'S SAVING

RATE: THE IMPACT OF THE AGE

STRUCTURE OF THE POPULATION AND

OTHER FACTORS'

By CHARLES YUJI HORIOKA

In this paper, I analyze the determinants of saving in Japan using national incomeaccounts data for the 1955-87 period. My results suggest that the age structure of the populationis the primary determinant of both trends over time in Japan's saving rate and thehigh level thereof relative to the other developed countries and that Japan's saving rate canbe expected to decline sharply due to the rapid increase in the ratio of the aged population tothe working-age population. The level and rate of growth of income, wealth, (in the case of

private and national saving) the unemployment rate, and (in the case of household saving)inflation are also found to influence the level of saving in Japan, and Japanese households arefound to see through the corporate veil to some extent but not through the government veil.

1. Introduction

In this paper, I analyze the determinants of saving in Japan using national income accounts data

for the 1955-87 period. The present study represents an improvement over virtually all previous

studies in the following six respects:1)

First, it makes use of newly available national income accounts data based on the United

Nations' new System of National Accounts (SNA) for the 1955-69 period. These data, com

binedwith previously available data, make it possible to construct a continuous time series of

national income accounts data for the period from 1955 to the present, and to the best of my

knowledge, the present study is the first to use these data for a time series analysis of Japanese

saving behavior. National income accounts data based on the new SNA were previously available

for Japan only for the period since 1965 (1970 for many series). For example, saving and income

data were available only for the period since 1965, while wealth data were available only for the

period since 1970. Thus, saving functions based on the new SNA data could be estimated only

for the period after 1965 (1970 if wealth were included as an explanatory variable), and time series

* I am grateful to Atsushi Maid, Shigeru Nishiyama, an anonymous referee, and participants of the 27thKeiryo Keizai-gaku Kaigi (Quantitative Economics Conference), held July 11-13, 1989, for their invaluablecomments and discussions. Any errors that remain are the sole responsibility of the author.

1) Hayashi (1986), Horioka (1990) and Mizoguchi (1988) survey the literature on Japanese saving andconsumption.

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The Economic Studies Quarterly

analyses of saving behavior for the postwar period as a whole were not possible. In 1988, how

ever,the Economic Planning Agency released national income accounts data based on the new

SNA for the 1955-69 period. Data for the 1955-64 period were made available for the first time

and, with respect to the 1965-69 period, the data were improved and previously unavailable series

(including wealth) were made available for the first time. Thus, all major series are now availableon a consistent basis for the entire period from 1955 to the present, which covers most of the

postwar period, and analyses of long-term trends in Japanese saving behavior have at last become

possible.Second, whereas most previous analyses of Japanese saving behavior either do not include any

wealth variable at all or use financial assets or financial net worth as the wealth variable (for

example, Ishikawa and Ueda, 1984, use financial net worth, while Mizoguchi, 1988, uses financial

assets), the present study uses a more comprehensive measure of wealth-namely, total net

worth, defined as the sum of financial and real assets minus liabilities-and moreover, all assets are

valued at market value.

Third, Japan is the only developed country except for Canada2) that values depreciation at his

toricalcost in the national income accounts, and virtually all previous studies of Japanese saving

behavior use the unadjusted national income accounts data on saving and income, which are

based on historical cost depreciation, but the present study uses saving and income data that are

based on depreciation figures that have been adjusted to a replacement cost basis, which is the

theoretically preferred concept.

Fourth, whereas most previous studies use the household saving rate as the dependent vari

able,the present study uses not only the household saving rate but also the national and private

saving rates in light of the lack of consensus about which is the most appropriate concept. The

private saving rate is the appropriate concept if households see through the corporate veil, thenational saving rate is the appropriate concept if they see through the government veil as well, and

the household saving rate is the appropriate concept if they do not see through either veil.

Fifth, the present study is one of the first time series analyses of Japanese saving behavior toinclude variables relating to the age structure of the population as explanatory variables. The

impact of the age structure of the population on saving is of great interest, first, because it sheds

light on the validity of the life cycle hypothesis and, second, because the populations of Japan and

many other countries are projected to age rapidly in the coming years.

Sixth, the present study is one of the first to project future trends in Japan's saving rate basedon the results of an econometric analysis.

To anticipate the main findings of my analysis, the age structure of the population is found

to be the primary determinant of both trends over time in Japan's saving rate and the high level

thereof relative to the other developed countries, and the estimation results are found to imply

that Japan's saving rate will decline sharply due to the rapid increase in the ratio of the aged

population to the working-age population. The level and rate of growth of income, wealth, (inthe case of private and national saving) the unemployment rate, and (in the case of household

2) In Canada, depreciation is valued on a historical cost basis except that it is valued on a replacementcost basis in the case of housing, agriculture, and government.

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Charles Y. Horioka: The Determinants of Japan's Saving Rate

saving) inflation are also found to influence the level of saving in Japan, and Japanese householdsare found to see through the corporate veil to some extent but not through the government veil

The remainder of the paper is organized as follows: I discuss the model and the data in Section

2, present the estimation results in Section 3, project future trends in Section 4, and conclude the

paper in Section 5.

2. The Model and DataAs noted in the preceding section, three saving rate concepts were used:

(1) SHR, the household saving rate (the saving rate of households, private unincorporatednon-funancial enterprises, and private non-profit institutions serving households), defined as

SH/YH,

(2) SPR, the private saving rate (the saving rate of the private sector), defined as SF/YP, and

(3) SNR, the national saving rate (the saving rate of the economy as a whole), defined asSN/YN,

where SH=the saving of households, private unincorporated non-financial enterprises, and

private non-profit institutions serving households.YH=the disposable income of households, private unincorporated non-financial enter

prises,and private non-profit institutions serving households, defined as the sum oftheir consumption and saving.

SP=private saving=SH+SC, where SH is as defined above and

SC=business saving, defined as the sum of the saving of non-financial incorporated

enterprises and that of financial institutions

YP=private national income=YH+SC

SN=SP+SG, where SP is as defined earlier and

SG=government saving

YN=national disposable income, defined as YP+SG+CG, where YP and SG are as

defined above and

CG=government consumption.

I used a net concept of saving because it is the theoretically preferred concept. Net saving is

calculated by subtracting fixed capital consumption (depreciation) from gross saving, and thus

data on depreciation are required. As noted in the previous section, depreciation is valued at

historical cost in the national income accounts of Japan even though it is theoretically preferable

to value it at replacement cost and even though it is valued at replacement cost in most other

countries, but fortunately, we were able to impute depreciation valued at replacement cost from

the stock and other data in the national income accounts using the procedure devised by Hayashi

(1986). Because the data needed to perform this imputation are not available for years prior to1970, we had to use the unadjusted figures for earlier years, but since inflation was relatively low

prior to 1970, the discrepancy between historical cost depreciation and replacement cost depreciationwas presumably relatively small and thus the bias from using saving figures based on histori

calcost depreciation is presumably not very serious.

The unadjusted and adjusted figures for the household, private, and national saving rates for

the 1955-87 period are shown in Table 1, and as the table shows, adjusting depreciation to a replacement

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cost basis makes a substantial difference in the saving rate figures, lowering the household

saving rate by as much as two to three percentage points, the private saving rate by as much as five

to six percentage points, and the national saving rate by as much as seven percentage points. (If

asset prices are increasing, replacement cost depreciation will exceed historical cost depreciation

Table 1 Trends over Time in Japan's Saving Rate

Notes: Refer to the text for variable definitions. The "unadjusted" figures are based on historical cost depreciation, while the "adjusted"figures are based on replacement cost depreciation.

Sources: (for 1955-69 data) Keizai Kikaku-cho, Keizai Kenkyu-sho (Economic Planning Agency, Economic Research Institute), ed.,Kokumin Keizai Keisan Hokoku (Choki Sokyu Suikei) (Report on National Accounts from 1955 to 1969), Tokyo, Japan: OkurashoInsatsu-kyoku, 1988.(for certain 1970-73 data) Keizai Kikaku-cho, Keizai Kenkyu-sho (Economic Planning Agency, Economic Research Institute),ed., Showa 55-nen Kijun Kaitei Kokumin Keizai Keisan Hokoku (Report on Revised National Accounts on the Basis of 1980),volume 1, Tokyo, Japan: Okura-sho Insatsu-kyoku, 1986.

(for 1970-87 data) Keizai Kikaku-cho, Keizai Kenkyu-sho (Economic Planning Agency, Economic Research Institute), ed.,Kokumin Keizai Keisan Nenpo (Annual Report on National Accounts), 1989 edition, Tokyo, Japan: Okura-sho Insatsu-kyoku,1989.


and thus saving net of depreciation will be lower if depreciation is valued at replacement cost.)

However, the tables show that trends over time are not significantly affected by the deprecia

tionadjustment. In the case of both the unadjusted and adjusted figures, the household saving

rate increased until 1976 (except for a temporary lull from 1961 until 1967), reaching a postwar

high of 21-23 percent in that year. Since then, it has declined steadily, falling to pre-1968 levels

(13-15 percent) by 1987. The private and national saving rates increased until 1970 (except for atemporary decline from 1961 to 1965), reaching a postwar high (27-28 percent in the case of the

former and 30-31 percent in the case of the latter) in that year. Both rates declined from 1970

until 1983, falling to 1955 levels or lower by 1983 in the case of the adjusted figures. (These de

clineswere far more precipitous than in the case of the household saving rate, amounting to 49

percent in the case of the private saving rate and 57 percent in the case of the national saving rateas opposed to 38 percent in the case of the household saving rate if we focus on the adjusted

figures.) Since 1983, however, both rates have begun increasing anew (except for a decline in the

private saving rate in 1987). Thus, all three rates have shown similar movements except duringthe 1970-76 and 1983-87 periods.

In terms of the absolute level of the saving rate in Japan, Table 1 shows that even the adjusted

figures based on replacement cost depreciation are exceptionally high by international standards:

the household saving rate has ranged from 13 to 21 percent, the private saving rate from 14 to 28

percent, and the national saving rate from 13 to 30 percent during the period for which the adjustedfigures are available (1970-87).

Turning to the regression analysis, the basic specifications used were as follows:

(1) SH=a0+a1YH+a2NWH(-1)

(2) SP=b0+b1YP+b2NWP(-1)

(3) SN=c0+c1YN+c2NWN(-1),where NWH=the net worth of households

NWP=the net worth of the private sector

NWN=the net worth of the economy as a whole,

and the other variables are as defined earlier.

In order to correct for heteroscedasticity, all variables were deflated by income, yielding the

following equations:

(4) SHR=SH/YH=a0(1/YH)+a1+a2NWH(-1)/YH

(5) SPR=SP/YP=b0(1/YP)+b1+b2NWP(-1)/YP

(6) SNR=SN/YN=c0(1/YN)+c1+c2NWN(-1)/YN,where the reciprocal-of-income variables are expressed in real, per capita terms.

To these basic specifications were added the following explanatory variables:

(in the household saving equations)

GYH=the growth rate of real, per capita household disposable income

SC/YH=the ratio of business saving to household disposable income

SG/YH=the ratio of government saving to household disposable income (in the private

saving equations)

GYP=the growth rate of real, per capita private national income

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SG/YP=the ratio of government saving to private national income (in the national saving

equations)

GYN=the growth rate of real, per capita national disposable income3) (in all equations)

AGE=the ratio of the aged population (defined as the population aged 65 and over) to the

working-age population (defined as the population aged 20 to 64)4)

DEP=the ratio of the dependent population (defined as the population aged 19 and under) to

the working-age population (defined as the population aged 20 to 64)

UNEMPL=the unemployment rate, defined as the ratio of totally unemployed persons to the

labor force

INFL=the inflation rate, measured as the rate of change in the price deflator for private final

consumption expenditure

The income growth variables GYH, GYP, and GYN were included to test (1) the life cycle

hypothesis prediction that income growth will cause the lifetime incomes of young savers to

exceed the lifetime incomes of aged dissavers and thereby lead to a higher aggregate saving rate,

(2) the permanent income hypothesis prediction that increases in income that are perceived to betransitory will be largely saved, and (3) the consumption lag/habit persistence hypothesis predic

tionthat increases in consumption will lag behind increases in income, leading to at least tempo

raryincreases in saving.

SC/YH, SG/YH, and SG/YP were included to test whether households see through the corporateand government veils, while AGE and DEP were included to test whether the age structure of

the population affects the saving rate, as predicted by the life cycle hypothesis. Since the aged

dissave, according to the life cycle hypothesis, and since minors contribute to consumption

without contributing to income, we would expect the coefficients of both variables to be nega

tive.

With respect to the unemployment rate UNEMPL, a number of effects are possible. For

example, an increase in unemployment may increase saving by increasing uncertainty about

future incomes, but on the other hand, if the unemployment rate is regarded as a proxy for cycli

calvariation, it would be expected to reduce saving (see Hadjimatheou, 1987, pp. 87-105, for a

more detailed discussion). Thus, the direction of impact is not determinate a priori.

Similarly, the direction of impact of the inflation rate INFL is also indeterminate a priori. For

example, inflation would be expected to increase saving if it increased uncertainty about future

real incomes or if economic agents sought to compensate for inflation-induced losses in the real

value of their wealth holdings, but on the other hand, inflation would reduce saving by reducing

3) I also tried defining the reciprocal-of-income variables and the income growth variables in aggregateterms, but the results were not significantly affected.

4) I also tried defining AGE as the ratio of the population aged 55 and over to the population aged 20 to54 and as the ratio of the population aged 60 and over to the population aged 20 to 59 (and adjusted thedenominator of DEP correspondingly) inasmuch as the formal retirement age in Japan was formerly 55and was only recently raised to 60, but the AGE and DEP variables as defined originally were found tooutperform the other variants. One possible reason for this is that, although the age of formal retirementis relatively early in Japan, complete withdrawal from the labor force typically does not occur untilmuch later.

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the real rate of return on saving if the substitution effect exceeded the income effect (see Hadji-

matheou, 1987, pp. 120-147, for a more detailed discussion).

Turning to the data sources used, all national income accounts data were taken from the

sources listed in the notes to Table 1, while all demographic data were taken from the Census of

Population (Kokusei Chosa), conducted by the Management and Coordination Agency (Somu

cho),for census years (namely, 1955 and every fifth year thereafter) and from the Report on Cur

rentPopulation Estimates (Jinko Suikei Shiryo), published by the Management and Coordination

Agency (Somu-cho), for intercensal years. Finally, the unemployment data were taken from the

Monthly Report on the Labour Force Survey (Rodo-ryoku Chosa Hokoku), published by the Mana

gementand Coordination Agency (Somu-cho).The conversion of nominal figures to real terms was done using the price deflator for private

final consumption expenditure. As all official population data pertain to October 1 of each year,

they were converted to a midyear basis by taking the weighted average of the figures for the

preceding and current years (attaching a weight of 1/4 to the former and a weight of 3/4 to thelatter).

Annual data for the 1956-87 period were used. The year 1955 had to be dropped from the

sample period because lagged values were needed to compute the income growth variables andthe inflation rate. The equations were initially estimated using ordinary least squares, but inas

muchas first-order serial correlation was found to exist, it was corrected for using the iterative

maximum likelihood procedure developed by Beach and MacKinnon (1978). The Cochrane-

Orcutt and Hildreth-Lu methods were also tried and found to yield very similar estimates (exceptthat the standard errors tended to be somewhat larger).

3. Estimation Results

The estimation results for the case of the private saving rate are shown in Table 2, while thosefor the case of the household and national saving rates are shown in Tables Al and A2 of the

Appendix, and as these tables show, the fit of the saving equations is satisfactory, with R2s as highas 0.76 in the case of the household saving equation, 0.79 in the case of the private saving equa

tion,and 0.74 in the case of the national saving equation. Moreover, most of the coefficients aresignificant and have the expected signs as well as reasonable magnitudes, and the results are gene

rallysimilar regardless of which saving concept is used.

The constant term, which of course represents the marginal propensity to save, is always highlysignificant and ranges from 0.13 to 0.57 in the household saving equation, 0.16 to 0.76 in the

private saving equation, and 0.18 to 0.80 in the national saving equation. The estimates at theupper ends of these ranges are implausibly high, but the standard errors are such that the confi

denceintervals include more plausible values.The coefficients of the reciprocal-of-income terms 1/YH, 1/YP, and 1/YN are negative, indicat

inga negative intercept in the saving equation and a positive intercept in the consumption equa

tion,but are often not significant.

The coefficients of the net worth (wealth) terms NWH(-1)/YH, NWP(-1)/YP, andNWN(-1)/YN are negative and often significant, ranging from -0.008 to -0.019 in the householdsaving equation, -0.016 to -0.033 in the private saving equation, and -0.018 to -0.038

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Table 2 Determinants of the Private Saving Rate

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in the national saving equation. These values are highly plausible, implying a marginal propen

sityto consume out of wealth of 0.01 to 0.04. Moreover, adding the net worth terms to the sav

ingequations improves their fit significantly in most cases. Finally, the fact that the coefficients

of the net worth terms have the expected sign is reassuring since some earlier studies (for

example, Ihara,1976, pp. 142-147) use a narrower concept of wealth (such as financial asset hold

ings)and fled that it has a positive impact on saving. Our finding underscores the importance of

using a comprehensive measure of wealth that includes not only financial assets but also real

assets as well as liabilities.

The coefficients of the income growth variables GYH, GYP, and GYN are, as expected, positive

and usually significant, ranging from 0.15 to 0.26 in the household saving equation, 0.11 to 0.29

in the private saving equation, and 0.16 to 0.26 in the national saving equation. Thus, a one

percentage point increase in the income growth rate raises the saving rate (however defined) by0.1 to 0.3 percentage points.

Turning to the variables relating to whether or not households see through the corporate and

government veils, the coefficient of the corporate saving variable was, as expected, negative andalmost always significant in the household saving equation. Its magnitude was in the -0.13 to-0 .30 range, indicating that there is a partial offset (of less than one-third) in household saving

in response to changes in corporate saving. The government saving variable was dropped fromthe final variants of both the household saving and private saving equations because it was

insignificant in the household saving equation and showed the wrong sign in the private savingequation.

As for the unemployment rate UNEMPL, it was dropped from the household saving equation

because its coefficient was found to be insignificant, but its coefficient was found to be negative

and usually significant in the private saving and national saving equations, ranging from -2.7 to-5 .2 in the former and from -2.8 to -6.1 in the latter. These values may seem implausibly

large inasmuch as they imply that a one percentage point increase in the unemployment rate

Table 2 (Continued)

Notes: The dependent variable is SPR, the private saving rate based on replacement cost depreciation.All variables are in ratio form except for 1/YP, which is in units of 1/1,000,000 constant (1980) yen.Refer to the text and to Table 1 for variable definitions and data sources.The sample period is 1956-87.The estimates have been corrected for first-order serial correlation using the iterative maximum likelihood procedure developed byBeach and MacKinnon (1978).The upper figure is the estimated coefficient, the middle figure is the standard error, and the lower figure is the T-statistic.

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lowers the saving rate by 3 to 6 percentage points, but it must be borne in mind that Japan's

unemployment rate has been unusually low by international standards, ranging from 1.1 to 2.9

percent during the sample period. The negative association between the unemployment rate

and the saving rate is presumably due to the fact that individuals reduce their saving during reces

sionaryperiods in order to maintain their consumption spending at earlier levels.

The inflation rate INFL was dropped from the private and national saving rate equations

because its coefficient was generally insignificant, but its coefficient was positive and often signifi

cantin the household saving equation. The magnitude of the coefficient was in the 0.12 to 0.19

range, indicating that a one percentage point increase in the inflation rate increases the household

saving rate by at most 0.2 percentage points. The positive coefficient of the inflation variable

suggests that inflation increases uncertainty about future real incomes or that it induces house

holdsto compensate for inflation-induced losses in the real value of their wealth holdings.

Turning finally to the demographic variables AGE and DEP, their coefficients are, as expected,

negative and generally significant. The coefficient of AGE ranges from -0.8 to -1.5 in the

household saving equation, -1.0 to -2.4 in the private saving equation, and -2.3 to -2.6 in the

national saving equation, while the coefficient of DEP ranges from -0.28 to -0.37 in the house

holdsaving equation, -0.29 to -0.48 in the private saving equation, and -0.37 to -0.48 in the

national saving equation. Thus, a one percentage point increase in AGE lowers the saving rate

(however defined) by at least one percentage point, while a one percentage point increase in DEPlowers the saving rate by at least 0.3 percentage points.5) However, it should be noted that multi

collinearityis present: for example, the correlation between AGE and the net worth variables is

about 0.96 (with both showing an increasing trend during the sample period), while the correla

tionbetween DEP and the reciprocal-of-income terms is 0.98 to 0.99 (with both showing a down

wardtrend during the sample period). As a result, the coefficients of one or more of these

variables become insignificant when they are introduced jointly. I am currently attempting to

find a solution to this problem.

I also tried splitting the sample period into two subperiods because of the possibility of a

structural shift in the early 1970s arising from the advent of the first oil crisis in 1973-74, the ac

celerationof inflation, the decline in economic growth, significant improvements in social secur

itybenefits, and other factors, but the parameter estimates were not significantly affected (except

that the coefficients of the demographic variables were not significant in the earlier subperiod),

and moreover, the Chow test for stability of coefficients showed that the relationships were

stable.6)

I would now like to consider whether trends over time in Japan's saving rate can be explained

on the basis of the foregoing results. As noted earlier, all three saving rates showed a humped

pattern during the 1955-87 period, with the peak occurring in 1976 in the case of the household

saving rate and in 1970 in the case of the private and national saving rates, and the foregoing

5) It is reassuring that the coefficients of the demographic and other variables are remarkably close tothose obtained in analyses based on cross-country data (see, for example, Horioka, 1989).

6) I tried breaking up the sample period in two different ways (1956-72/1973-87 and 1956-73/1974-87),but the results were not significantly different.

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Charles Y. Horioka; The Determinants of Japan's Saving Rate

results imply that this humped pattern is due primarily to trends over time in the age structure of

the population. AGE increased throughout the period under analysis and thus produced a tenden

cyfor the saving rate to show a downward trend, while DEP declined throughout the period

under analysis and thus produced a tendency for the saving rate to show an upward trend. Dur

ingthe first half of the period under analysis, the decline in DEP was relatively rapid and thus the

impact of DEP exceeded that of AGE, causing the saving rate to show an upward trend. During

the latter half of the period under analysis, by contrast, the increase in AGE was relatively rapid

and thus the impact of AGE exceeded that of DEP, causing the saving rate to show a downward

trend. Thus, it was the combination of an acceleration in the rate of increase of AGE and

a deceleration in the rate of decline of DEP that led the saving rate to turn downward midway

through the period under analysis.

Moreover, Horioka (1989) has found that the peculiar age structure of Japan's population (in

particular, the relatively low levels of both AGE and DEP) is the most important reason why Japanhas shown a higher saving rate than the other developed countries. Thus, the age structure of the

population can explain not only trends over time in Japan's saving rate but also its high level relativeto the other developed countries.

4. Future Trends in Japan's Saving Rate

In this section, I project future trends in Japan's saving rate based on the results of the econo

metricanalysis in the previous section.7) I focus in particular on the impact of projected changes

in the age structure of the population, especially the rapid increase in the proportion of the aged

that is expected to occur over the next several decades. Because of space limitations, I present

results only for the private saving rate, but projected trends in the household and national saving

rates are generally similar.

Columns (2) and (4) of Table 3 show projected trends in AGE and DEP, respectively. AGE (the

ratio of the population aged 65 and over to the population aged 20 to 64) is projected to more than

double between 1987 and 2010 (increasing from 0.177 to 0.356) and to increase further to 0.440

by 2020, thus making Japan's population the most aged in the world. By contrast, DEP (the ratio

of the population aged 19 and under to the population aged 20 to 64) is projected to remain more

stable, declining from the 1986 value of 0.465 to 0.389 by 1997-98, then increasing anew (to 0.437

by 2010).

The rapid increase in AGE will create strong downward pressure on the private saving rate, as

shown in column (3), but this downward pressure will be partly offset by the upward pressure

created by the decline in DEP, at least until 1997-98 (see column (5)). The net change in the

private saving rate attributable to changes in the age structure of the population is shown in

7) A similar simulation exercise based on the results of a cross-country analysis can be found in Horioka(1989). Auerbach, Kotlikoff, Hagemann and Nicoletti (1989) use a simulation model to analyze theimpact of the aging of the population on future trends in the national saving rates of Germany, Japan,Sweden, and the United States, while Auerbach and Kotlikoff (1989) use a similar approach to analyzefuture trends in the U.S. national saving rate and Fukao and Doi (1985) and Keizai Kikaku-cho (1985,Chapter 3) use a similar approach to analyze future trends in Japan's household saving rate. All of theseanalyses obtain results qualitatively similar to those of the present study.

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column (6), and the projected value of the private saving rate is shown in column (7).

As column (7) shows, I project that Japan's private saving rate will exhibit a long-term decline

over the next few decades, falling from its 1987 value of 14.1 percent to 13.3 percent by 1990, 11.0

percent by 1995, 6.8 percent by 2000, 2.0 percent by 2005, and -3.7 percent by 2010. The rate ofdecline will be relatively gradual at first partly because the rate of increase of AGE will be relatively

moderate at first and partly because (as noted above) the impact of the increase in AGE will be

Table 3 Future Trends in Japan's Private Saving Rate

Notes: SPR=the private saving rateAGE=the ratio of the population aged 65 and over to the population aged 20 to 64DEP=the ratio of the population aged 19 and under to the population aged 20 to 64The projected change in SPR that is due to the change in AGE was calculated by multiplying the projected change in AGE by thecoefficient of AGE in variant 14 of Table 2 (-1.0374). Similarly, the projected change in SPR that is due to the change in DEP wascalculated by multiplying the projected change in DEP by the coefficient of DEP in the same variant(-0.2904). The net change inSPR was calculated as the sum of the change due to the change in AGE and the change due to the change in DEP. The projectedvalue of SPR was calculated by subtracting the net change in SPR from the value of SPR in the previous year. Figures may not adddue to rounding error.

Sources: Data on future values of AGE and DEP were computed from data on the medium estimates (chui suikei) of population by agegroup presented in Tables 2-1, 2-2, and 2-3 (pp. 46-51) of Kosei-sho, Jinko Mondai Kenkyu-sho (Ministry of Health and Welfare,Research Institute for Population Problems), ed., Nihon no Shorai Suikei Jinko, Showa 60-100 nen (Showa 101-160 nen SankoSuikei) (Population Projections for Japan: 1985-2085), Tokyo, Japan: Zaidan Hojin Kosei Tokei Kyokai,1987. These data pertainto October 1 of each year but were converted to a midyear basis by taking the weighted average of the figures for the precedingand current years (attaching a weight of 1/4 to the former and a weight of 314 to the latter).See the text and Table 1 for the data sources used for the 1987 values of AGE, DEP, and SPR.

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partly offset by the impact of the decline in DEP. However, the rate of decline will graduallyaccelerate (due partly to the acceleration of the rate of increase of AGE and partly to the bottom

ingout of DEP in 1997-98) and will exceed one percentage point per year after the turn of the

century. Projections for more distant years are not shown in Table 3, but even further declines in

Japan's private saving rate can be expected through the early 2040s due to continued increases in

AGE. Thus, my projections suggest that Japan will not remain a high-saver nation for long and

that, after about the year 2007, she will not be doing any saving at all but rather dissaving.

However, these projections must be regarded as tentative because of the crude nature of the

calculation method and because I have assumed that factors other than the age structure of the

population will remain constant, an unrealistic assumption. It is likely that structural changes orchanges in government policies (such as an increase in the retirement age) will occur that slow

the decline in Japan's saving rate and prevent it from becoming negative.8)

5. Summary and Policy Implications

In this paper, I analyzed the determinants of saving in Japan using national income accounts

data for the 1955-87 period. My results suggest that the age structure of the population is the

primary determinant of both trends over time in Japan's saving rate and the high level thereofrelative to the other developed countries and that Japan's saving rate can be expected to decline

sharply due to the rapid increase in the ratio of the aged population to the working-age popula

tion.The level and rate of growth of income, wealth, (in the case of private and national saving)

the unemployment rate, and (in the case of household saving) inflation were also found to influ

encethe level of saving in Japan, and Japanese households were found to see through the corpo

rateveil to some extent but not through the government veil.

The significance of the variables relating to the age structure of the population suggests that the

life cycle hypothesis is applicable in the case of Japan and hence is at variance with analyses of

household-level data that find little or no evidence of dissaving by the aged in Japan (see, for

example, Hayashi, Ando, and Ferris, 1988). A reconciliation of these conflicting findings is an

important area for further research.

My results must be regarded as tentative because of the presence of multicollinearity, the omis

sionof possibly relevant variables such as the level of social security benefits, and the inconsis

tencywith the micro-level evidence, but if my findings are borne out by further work, they have

important policy implications. The decline in Japan's saving rate that I am projecting will cause

Japan's external imbalances to narrow and eventually to reverse themselves, thus mitigating cri

ticismfrom abroad. However, my projections show that the decline in the saving rate will be

relatively gradual for the next several years, and thus the natural decline in Japan's saving rate

may not be enough to quell criticism from abroad concerning Japan's trade and current account

surpluses. Other countermeasures (such as increased investment in social overhead capital) may

be necessary as well as desirable in the short run, as argued by Noguchi (1989).

8) Auerbach and Kotlikoff (1989) and Auerbach, Kotlikoff, Hagemann and Nicoletti (1989) show thatdiffering assumptions concerning future government policies lead to substantial differences in futuretrends in the saving rate.

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APPENDEXTable A1 Determinants of the Household Saving Rate

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Table A1 (Continued)

Notes: The dependent variable is SHR, the household saving rate based on replacement cost depreciation.All variables are in ratio form except for 1/YH, which is in units of 1/1,000,000 constant (1980) yen.Also see the notes to Table 2.

Table A2 Determinants of the National Saving Rate

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(Osaka University)First draft received June 22, 1989; final draft accepted June 4, 1990.Table A2 (Continued)Notes: The dependent variable is SNR, the national saving rate based on replacement cost depreciation.All variables are in ratio form except for 1/YN, which is in units of 1/1,000,000 constant (1980) yen.Also see the notes to Table 2.

REFERENCES

Auerbach, Alan J. and Laurence J. Kotlikof (1989) "Demographics, Fiscal Policy, and U.S. Saving in the1980s and Beyond," National Bureau of Economic Research Working Paper, No. 2979 (October).

-, -, Robert Hagemann, and Giuseppe Nicoletti (1989) "The Dynamics of an Aging Population:The Case of Four OECD Countries," National Bureau of Economic Research Working Paper, No.2797 (February).

Beach, Charles M. and James G. MacKinnon (1978) "A Maximum Likelihood Procedure for Regressionwith Autocorrelated Errors," Econometrica, Vol. 46, No. 1, pp. 51-58.

Fukao, Mitsuhiro and Kazuaki Doi (1985) "Jinko Korei-ka to Chochiku-ritsu" (The Aging of the Populationand the Saving Rate), Keizai Semind, No. 369, pp. 63-69.

Hadjimatheou, George (1987) Consumer Economics after Keynes: Theory and Evidence of the ConsumptionFunction, Brighton, Sussex, Great Britain: Wheatsheaf Books Ltd./Harvester Press Publishing Group.

Hayashi, Fumio (1986) "Why Is Japan's Saving Rate So Apparently High?" in Stanley Fischer, ed., NBERMacroeconomics Annual 1986, volume 1, Cambridge, Mass.: MIT Press, pp. 147-210.-, Albert Ando and Richard Ferris (1988) "Life Cycle and Bequest Savings. A Study of Japanese and

U.S. Households Based on Data from the 1984 NSFIE and the 1983 Survey of Consumer Finances,"Journal of the Japanese and International Economies, Vol. 2, No. 4, pp. 450-491.

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Horioka, Charles Yuji (1989) "Why Is Japan's Private Saving Rate So High?" in Ryuzo Sato and TakashiNegishi, eds., Developments in Japanese Economics, Tokyo, Japan: Academic Press Japan, Inc./HarcourtBrace Jovanovich, Publishers, pp. 145-178.

- (1990) "Why Is Japan's Household Saving Rate So High? A Literature Survey," Journal of the Japaneseand International Economies, Vol. 4, No. 1, pp. 49-92.

- (1991) "Future Trends in Japan's Saving Rate and the Implications Thereof for Japan's ExternalImbalance," Japan and the World Economy, Vol. 3, forthcoming.

Ihara, Tetsuo (1976) Kojin Chochiku no Kettei Riron (A Theory of the Determination of Personal Saving),Tokyo, Japan: Toyo Keizai Inc.

Ishikawa, Tsuneo and Kazuo Ueda (1984) "The Bonus Payment System and Japanese Personal Savings," inMasahiko Aoki, ed., The Economic Analysis of the Japanese Firm (Contributions to Economic Analysis,No. 151), Amsterdam: North-Holland, pp. 133-192.

Keizai Kikaku-cho (Economic Planning Agency) (1985) Keizai Hakusho (Economic White Paper), 1985 edition,Tokyo, Japan: Okura-sho Insatsu-kyoku.

Mizoguchi, Toshiyuki (1988) "Nikon no Shohi Kansu Bunseki no Tenbo" (Prospects for ConsumptionFunction Analysis in Japan), Keizai Kenkyu, Vol. 39, No. 3, pp. 253-276.

Noguchi, Yukio (1989) "Kongo no Kokyo Toshi Seisaku: Jinko Korei-ka, Taigai Shushi to no Kanren ni oite"

(Future Public Investment Policy and Its Relation to the Aging of the Population and ExternalBalances), in Zairian Hojin Nihon Hosei Gakkai, ed., Chuchoki-teki Zaisei Un'ei ni tsuite no Chosa KenkyuHokoku (Research Report concerning the Medium- and Long-Term Management of Fiscal Policy),Tokyo, Japan: Zairian Hojin Nihon Hosei Gakkai, pp. 18-25.

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