Changes in household savings rate and financial asset selection behavior and their impacts on the flow of funds in Japan (report; outline) |
I. Introduction ~ Basic issues ~ | |||
In the flow of funds in Japan, the household sector has consistently retained a high savings rate since the end of World War II, providing funds to finance active capital investment by the corporate sector during the high economic growth period and the deficits of the public sector during the stable growth period. Amid the dramatic on-going changes in the economic and social structures in the 21st century, such as the advance of the aging of the population with fewer children, progress in financial system reform, the social security system, and the innovation of information technology, the environment surrounding Japan’s flow of funds is also undergoing dramatic change. This is expected to change the future structure of flow of funds from the household sector. The Study Group looked into, along with other issues, 1) future movement of the household savings rate and 2) future changes in households’ financial asset selection behavior, in the 21st century. This Report contains the contents of discussions held at Study Group meetings and results of various surveys and research concerning households. It also studies future movements of the household sector and its impact on the flow of funds in Japan. | |||
II. Actual state of Japan’s household savings rate and financial asset selection behavior | |||
1. | Changes in Japan’s household savings rate | ||
Based on the System of National Accounts, the changes in the Japanese household savings rate since the end of World War II can roughly be divided into three phases. The rate was consistently rising until the mid-1970s, went on a downward trend from the mid-1970s to the 1980s, and remained almost unchanged in and after the 1990s. | |||
2. | Actual state of households’ financial asset selection behavior | ||
(1) | Actual state of households’ financial asset selection behavior and its characteristics | ||
1) | The proportion of safe assets, such as deposits and savings, is high. (compared with other countries) | ||
2) | The share of financial assets held by elderly households is high. | ||
3) | Financial assets are concentrated in the households of large savers. | ||
4) | The share of risk assets held by the households in big cities is high. | ||
5) | The household’s inclination toward safe assets remains persistently strong. | ||
(2) | The background of the high proportion of safe assets in financial asset composition The following can be thought of as factors behind the high proportion of safe assets, such as deposits and savings, in Japanese households’ financial assets: | ||
1) | In relation to real assets The investment stance of Japanese households was to make a long-term investment in real assets like housing, while securing liquidity with deposits and savings. | ||
2) | In relation to age and investment capacity The investment capacity of young people, who are by nature suitable to make investment in risk assets, is low, while the amount of assets held by older people, who have less incentives to make investment in risk assets, is large. Therefore, the proportion of risk assets was low as a whole. | ||
3) | In relation to employment and wage systems The existence of the seniority-based wage system, lump-sum retirement benefit, the defined benefit pension scheme, etc. tended to dissolve the disparity of individuals’ income and outlay in their life cycle. Therefore, they did not need to actively conduct asset management themselves. | ||
4) | Lack of knowledge on financial instruments and investment methods Japanese households lacked knowledge on risky financial instruments. So, they tended to select safe assets that did not require information on risks. They also lacked understanding of the effectiveness of long-term diversified investment in making investment in risky financial instruments. | ||
5) | Popular recognition that deposits and savings are “completely safe assets.” Since the so-called pay-off system on deposits has never been implemented and since postal savings are guaranteed by the public sector, deposits and savings have been considered as being “completely safe assets.” Therefore, people have failed to develop the investment manner of selecting the optimum composition of safe and risk assets by taking into account the trade-off of risks and returns. | ||
6) | Existence of regulations of financial service providers Due to the existence of various regulations, there was a lack of financial instruments attractive to customers. Financial instruments were not offered smoothly to customers due to inadequate sales channels. | ||
7) | Problem of profitability Risk assets, such as stocks and stock investment trusts, were not attractive investment instruments, as returns on stock investment were low due to the practice of cross-shareholdings, etc. | ||
III. Factors that affect household savings rate and financial asset selection behavior | |||
1. | Impact of aging of the population | ||
(1) | Impacts on household savings rate | ||
(2) | Impact on households’ financial asset selection behavior In Japan, the greater proportion of financial assets is held by the elderly. Further advance of the aging of the population would intensify this trend. This advance, or the so-called economy’s move toward stock, would, on the average, enhance household’s risk-tolerance capacity and could increase the share of risk assets held by households. Moreover, it is pointed out that some elderly people have become positive in their financial asset selection. | ||
2. | Impacts of social security systems | ||
(1) | Impact on household savings rate | ||
1) | Impact of public pension schemes In view of the moves toward raising the age of eligibility for pension benefits and reducing benefits, public pension schemes are generally believed to be a factor to raise household savings rate and increase people’s self-help efforts to secure funds for livelihood in their old age. Meanwhile, it is pointed out that a growing number of households have begun to recognize the need to reform public pension schemes and that they have increased their propensity to save, against the background of growing uncertainties about their future pension benefits and premiums. From this viewpoint, securing the sustainability of pension schemes by making necessary reform of the system would give a sense of security to households and lower the household savings rate. | ||
2) | Impacts of medical/nursing risks As for nursing risks, they are believed to be a factor to raise the household savings rate in view of the concerns that nursing expenses may be prohibitively high for households. But, once the public nursing insurance system, which was introduced last year, takes hold, such concerns would be considerably reduced. As for medical risks, they are also likely to raise the household savings rate in view of the severe financial conditions of individual medical insurance holders and in view of the concerns about the sustainability of public medical insurance systems. However, the household savings rate would decline, if it became clear that specific reforms would be made to remove uncertainties about the systems, in line with, for example, the outline of social security reform worked out by the government and ruling parties’ study panel on social security reform. | ||
(2) | Impact on households’ financial asset selection behavior | ||
3. | Impact of changes in employment and wage systems | ||
(1) | Impact on household savings rate Amid the ongoing economic structural reform, there are signs of changes in the conventional employment systems, such as the seniority-based wage system and life-time employment system. These changes would increase the uncertainties of households and become a factor to raise the household savings rate. However, as the government is striving to establish a system to cope with changes in employment, it is expected to dissolve the uncertainties of households to a certain extent. | ||
(2) | Impact on households’ financial asset selection behavior | ||
4. | Impact of fewer children (Impact of increases in opportunities of owned-house inheritance or gift, etc.) | ||
(1) | Impact on household savings rate | ||
(2) | Impact on households’ financial asset selection behavior | ||
5. | Impact of financial system reform on households’ financial asset selection behavior | ||
Progress in financial system reform is expected to promote competition, lower commissions, diversify service providing channels and diversify services in response to customers’ needs. Such reform and changes on the part of financial service providers are expected to prompt households to diversify their financial asset selection behavior. | |||
6. | Impact of liberalization of cross-border capital transactions on households’ financial asset selection behavior | ||
As a result of the revision of the Foreign Exchange Control Law, which was implemented as the first step of the financial system reform, cross-border capital transactions have been liberalized in principle and foreign exchange businesses have been completely liberalized, making it possible for households to put their money into foreign banks and engage in cross-border securities transactions. Under the circumstance which free access to foreign financial assets secured, due to the indirect effect such the free access and rising households’ preference toward foreign currency-denominated assets as a result, the balance of foreign currency-denominated deposits and MMFs held by households has increased. Households’ investment in foreign assets is expected to further increase in the future. | |||
7. | Impact of innovation of information technology on households’ financial asset selection behavior | ||
Innovation of information technology has diversified the means to provide services and lowered the costs to collect and provide information. In the financial field as well, new financial services will be provided through the use of information technology and households will be able to obtain information concerning financial asset investment easily. This would result in a diversification of households’ financial asset selection behavior. | |||
8. | Impact of education for investors on households’ financial asset selection behavior | ||
The improvement of education for investors is a basic condition for encouraging more households to invest in risk assets. If households, as a result of education, begin to adopt an investment stance, under which they incorporate risk assets in their portfolios while managing the risks involved in their long-term diversified investment, Japanese households’ financial asset selection behavior would shift to risk assets. | |||
9. | Impact of rescinding full guarantees for bank deposits on households’ financial asset selection behavior | ||
If the government lifts the ban on the so-called payoff system, households are expected to shift their asset selection behavior away from that based on the safety and profitability of financial instruments to that aimed at raising the safety and profitability of their portfolios as a whole, by, for example, diversifying their assets into a range of financial institutions and instruments. As part of the diversification of portfolios, investment in risk assets is likely to increase. | |||
IV. Outlook for changes in household savings rate and financial asset selection behavior and their impact on the flow of funds in Japan | |||
1. | Future trend of household savings rate | ||
Since the future movement of the household savings rate will be affected by various factors, we have to consider it with wide range. But, if we take into account the various analyses made so far, such as those on the impact of aging of the population and on the direction of social security system reform, there is no denying the fact that the rate will follow a downward trend in the medium and long term. | |||
2. | Future trend of households’ financial asset selection behavior and points of note | ||
(1) | Future trend of households’ financial asset selection behavior | ||
(2) | Points of note in promoting change of households’ financial asset selection behavior | ||
3. | Impact on the flow of funds | ||
(1) | In relation to the public sector | ||
(2) | In relation to the corporate sector | ||
(3) | In relation to the foreign sector | ||
4. | Future policy development | ||
With this Report, the Study Group completes its examination, albeit only from limited angles, of the positions of the public, corporate, and household sectors in the flow of funds in Japan and their future movement. In making policies in the future, we believe it is necessary to work out measures based the problems of each sector analyzed by the Study Group but not limiting it to them but also taking into account the flow of funds in its entirety so that Japanese funds as a whole can be efficiently utilized. |
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