report(outline)

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 The advance of the aging of the population is believed to be a factor to lower the household savings rate. But, according to the studies made so far, its impact will be more moderate than is assumed under a purely life-cycle hypothesis that the savings rate of the elderly would post negative.
	(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 The reform of the public pension scheme is expected to increase the importance of private-run pension systems and long-term asset management by individuals. The defined-contribution pension scheme, whose introduction is being studied, may trigger a shift to risk assets, such as investment trusts, as the scheme, if introduced, is expected to enhance households’ learning of investment trusts and investor education.
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 Further progress in the changes in employment and wage systems will promote a shift to risk assets, as the necessity of independent, strategic asset formation will increase and people who will have enough money to positively make financial asset investment are expected to emerge even among the younger population.
4.	Impact of fewer children (Impact of increases in opportunities of owned-house inheritance or gift, etc.)
	(1)	Impact on household savings rate A large proportion of households cite “for the purchase of housing” as the reason for savings. However, if the trend for fewer children intensifies, the opportunity of acquiring housing through inheritance or gift is expected to increase. Move over taking account into the decline in the growth rate of the number of households the cost bearing for the acquisition of housing is likely to decrease on average.These would become a factor to decrease the household savings rate.
	(2)	Impact on households’ financial asset selection behavior Since the burden of housing investment for households is expected to decrease as a result of a decrease in their cost bearing for housing acquisition, the possibility of households shifting their financial assets to risk assets is likely to increase.
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 Households’ future asset selection behavior as a whole is likely to change into various kinds of asset composition. However, in order to make it a full-fledged change, it is prerequisite to enhance the profitability of risk assets, such as stocks and investment trusts, and make them attractive investments. Therefore, it is necessary to make efforts to enhance the value of corporations through reviews of corporate finance and corporate governance, etc.
	(2)	Points of note in promoting change of households’ financial asset selection behavior In order to promote a move toward the diversification of households’ financial asset selection behavior smoothly and steadily, it is necessary to establish an environment in which full information on the location of risks to the households is provided and in which correct understanding of such information is facilitated. From this standpoint, it is important to improve the disclosure of information by financial institutions, promote the provision of information on financial instruments in a way easy for individuals to understand and thus make comparison with other products, and promote education for investors.
3.	Impact on the flow of funds
	(1)	In relation to the public sector If the savings rate of the household sector is to move in a downward trend in the medium and long term, it is likely to put a certain amount of constraints on public sector fund procurement. The move toward the diversification of households’ financial asset selection behavior is also likely to affect government debt management (indirectly decreasing the channels of government bond holders through outflow of individual assets, deposits and savings, etc.). Therefore, it is necessary to review the government’s debt management policy and new issue policy as the need arises, while keeping a close watch on the direction of the change in households’ financial asset selection behavior.
	(2)	In relation to the corporate sector The fact that households’ financial selection behavior is likely to begin to move toward diversification suggests that the household sector may be able to respond to the financial needs of corporations as the main supplier of funds. The issue of coping with the necessity of financing in response to corporations’ financial needs that differ depending on the stage of growth was pointed out in last year’s report concerning the corporate business sector. The Japanese financial system has up to now been mainly indirect financing and most of the risks involved in asset management, etc. are concentrated on financial intermediaries. However, the risks have become diversified and complicated due to the rapid socio-economic changes, etc. in recent years and it has become difficult for such a system to allocate resources in an efficient and appropriate manner. In this sense, the move of households’ financial asset selection behavior toward diversification is expected to have a good impact on the economy as a whole, as it will lead to efficient and appropriate allocation of funds and risks in corporate fund raising.
	(3)	In relation to the foreign sector With free access to foreign financial assets secured, it is anticipated that Japanese households’ funds will move outside of Japan in line with the progress in the diversification of households’ financial asset selection behavior. In order to secure necessary funds for the public and corporate business sectors on the basis of that assumption, it is necessary to secure an inflow of funds from abroad to complement the outflow of funds from Japan. To this end, it is necessary to make the Japanese financial and capital markets attractive to foreign investors and enhance the value of financial products. Corporations’ further efforts and improvement of market environment are required for that purpose.
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.

(BOX – 1) Actual economic conditions of the elderly
-	On average, the amount of assets held by elderly households is larger than that held by younger households. A survey result also shows that the proportion of the elderly who have no trouble making ends meet is higher than the proportion of comparable younger people.
-	However, since the economic gap between rich and poor people among elderly households is bigger compared with the gap among younger people, it is problematic to infer the economic condition of the elderly in terms of an “average picture.”
-	But analyses of the characteristics of the actual economic conditions of the elderly by type of household show that there are huge economic gaps among the types of household. Among the elderly, those who are not economically well off are mainly women living alone.
-	At present, income is usually used as a means to grasp the economic condition of the elderly. It is true that, on average, income and assets are mutually related to a certain extent. But, studies of the relationship between income and asset using individual data show no clear correlation between the two. That is to say, there are people who have a huge amount of assets although their income is small and there are people who have little assets although their income is high. Therefore, in order to grasp the economic conditions of the elderly, it is necessary to comprehensively take income and assets into consideration.
-	In studying measures for the elderly in the future, it is necessary not to see the elderly as a uniform group but to understand the economic conditions of each household by comprehensively taking income and assets into consideration and to implement more fine-tuned measures in accordance with each condition. In this connection, some financial institutions reported during a hearing session of the Study Group that they were developing financial products targeting senior citizens.

(BOX – 2) Changes in German households’ financial asset selection behavior
-	German households’ financial asset selection behavior was conventionally accounted for by a large proportion of cash and deposits, as in Japan. But, the share of stocks, investment trusts and other risk assets held by households has increased throughout the 1990s. The proportion of cash and deposits declined by about 10 percentage points from 45.8% in 1991 to 35.2% in 1999, while the balance of stocks/investment and investment trusts increased by about 13 percentage points from 14.6% to 27.3%. In particular, the balance of investment trusts rose to 10.5%, approaching the level of the U.S. (10.9%).
_-	A general survey of German households’ financial asset selection behavior shows that 1) from the 1960s to the 1970s, baby boomers had increased savings deposits to purchase housing and durable consumer goods, 2) in the 1980s, with baby boomers’ housing investment having run its course, savings-type insurance and bond investment had became popular, and 3) in the 1990s, stock markets and investment trusts began to draw attention.
-	With regard to the increased role played by the household sector in the German financial and capital markets recently, some attribute it mainly to the country’s tax system. But it should be attributed primarily to the facts that the German government implemented a series of measures to promote the financial and capital markets gradually and systematically under financial market promotion laws in the 1990s and that major financial institutions have become investment banks due to severe competition following the reorganization of the financial industry triggered by the unification of EU currencies. (Note) Under the German tax system, unlike those in other industrialized countries, capital gains on long-term land and equity holdings are in principle tax-free. This is because the German income tax treats only recurring gains as “profits.” This treatment has remained unchanged since the 1920s.
-	First, let’s take a look at the bond market. During the first half of the 1990s, fiscal deficits swelled and the issuance of public bonds increased against the background of German reunification. In order to finance this, the government had to promote an inflow of funds from abroad and began establishing infrastructure for that purpose. As a result, the bond market has become internationalized and non-residents purchased most of the bonds issued during this period. During the second half of the 1990s, the bond market made a smooth development and, with the introduction of “jumbo bonds” in the private bond sector, the issuance of Pfandbriefe bonds became active.
-	At the same time, “stock culture” spread rapidly among the German people during the 1990s. Generally speaking, German households hold stocks indirectly through institutional investors, such as insurance companies and investment trusts, rather than buying stocks directly. Factors behind the development of stock investment trusts in Germany are, in addition to the government’s market promotion measures adopted so far, as follows:
	1)	The advance of the aging of the population has made households concerned about the public pension system and they have become more active in asset management, including risk assets such as stocks and investment trusts.
	2)	Returns on bond investment have declined, with long-term interest rates having stayed below the “wall of 6%” (said to be German insurance companies’ guaranteed annual yield) since the second half of the 1990s. As a result, the attractiveness of investment in bonds as risk assets has relatively declined.
	3)	Banks have increased over-the-counter sales of stock investment trusts.
	4)	People’s awareness of stocks increased as a result of public offering of German telecom stocks.
	5)	Stock markets were buoyant.
-	As seen from the above, the German financial and capital markets underwent a dramatic change during the 1990s. So did households’ financial asset selection behavior. There are many similarity between the changes that occurred in Germany and those in Japan, such as 1)-3) factors above. What differs greatly between the two countries is that the Japanese people (and particularly individual investors) have a deep-seated distrust toward the stock market due to the aftereffects of the bubble economy. In order for Japan to attract individual investors to the stock market, it is necessary to remove such distrust.

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