Household Savings Rate Turns Negative: Corporate savings holding the key to absorbing government bonds issuance

Faculty Fellow, RIETI

The media has reported sensationally on the fact that Japan's household savings rate turned negative (-1.3%), as cited in the FY2013 Annual Report on the System of National Accounts released by the Cabinet Office at the end of 2014. This has been predicted correctly by economists from about a year ago, and its impact on the future outlook of the Japanese economy has been discussed extensively.

The recent household savings rate dropped by 3.5 percentage points in two years from the 2.2% recorded in FY2011. It might seem like a sizeable fall, but in the early 2000s, the rate tumbled by as much as 4.6 percentage points over a two-year period from 8.1% in FY1999 to 3.5% in FY2001.

The figure shows the household savings rate as well as the changes in household income and consumption since FY1995, so as to examine the background of the two substantial rate drops in the past. By definition, "savings" is the amount of income less consumption. A decline in the household savings rate is caused by either Japanese households increasing consumption and outstripping their income or maintaining their previous level of consumption (or an inability to reduce consumption at least in the short-run) despite a drop in income. As the figure clearly shows, the rate drop in the early 2000s was due to a substantial decline in household income, whereas the most recent drop is attributable to the increase in consumption.

Did consumption rise because of the last-minute surge in demand before the increase in the consumption tax rate or were households anticipating a future income hike? A clear conclusion cannot be drawn until more recent, detailed data become available. However, in view of the rapid slowdown of consumption growth since last summer, it is extremely likely that the last-minute consumption rush just before the increase in the consumption tax rate was the primary reason why the household savings rate tumbled below zero in FY2013.

Figure: The Recent Rapid Fall in the Household Savings Rate is
Second to the One in the Early 2000s
(Household savings rate and change in household income/consumption from the previous year)
Figure: The Recent Rapid Fall in the Household Savings Rate is Second to the One in the Early 2000s
Source: Cabinet Office

♦  ♦  ♦

More specifically, household consumption dropped by 4.0% in the comparison of the six-month periods just before and after the consumption tax rate hike in April 2014. The compensation of employees and gross domestic product (GDP) dropped by 1.0% and 1.3% respectively (seasonally adjusted real-value basis).

At the time of the consumption tax rate increase from 3% to 5% in 1997, the nation's consumption and GDP only decreased by 2.0% and 0.4% respectively. The economic slowdown after the tax rate increase in April 2014, particularly the slowdown of consumption, was significantly dramatic in comparison.

Based on these figures, the household savings rate is likely to return to positive in FY2014. The Japanese household savings rate has been declining slowly since the 1980s, but it is difficult to imagine that a drastic structural change has occurred to keep the figure in negative territory this time.

Of course, debates solely based on macroeconomic figures do not provide an accurate outlook for the household savings rate. Yet, unfortunately, it is difficult to make any definitive statement about the level of the macroeconomic household savings rate, regardless of how much statistical microeconomic data available today are analyzed.

For example, the basic data on household consumption and savings behaviors are founded on the Family Income and Expenditure Survey conducted by the Ministry of Internal Affairs and Communications, but it is a long-known fact that there is a huge gap between data from the family income and expenditure survey and GDP statistics. While economists including my colleague Takashi Unayama (current Principal Economist, Policy Research Institute, Ministry of Finance) and myself have conducted studies concerning this issue, it is impossible at this point to bridge this gap completely.

One of the reasons for this gap is that the Family Income and Expenditure Survey is biased toward what it deems to be an "average" household economy in terms of age and income level. Since the 1990s, the Japanese economy has seen a steady increase in the ratio of "non-average" households due to a widening income gap and the aging of the population. These trends are only aggravating the matter.

There is no denying that official statistics do not sufficiently cover the consumption/saving behaviors of low-income earners and the nation's top earners. While I understand the efforts of those compiling the statistics, the issue cannot be resolved with the efforts of those involved alone. It is necessary to develop a statistical approach based on today's social and academic needs, including the need to substantiate budget allocations.

♦  ♦  ♦

In the debates concerning the latest household savings figure, many have pointed to the possibility that government bonds might be issued beyond what the domestic demand could absorb. This means that government bonds may have to be targeted at foreign investors. However, since foreign investors would not buy the bonds if their yields are low, bond yields could skyrocket, triggering a fiscal crisis.

When it comes to the simple matter of the fund shortfall, it has been the case for many years that the household sector alone could no longer absorb the Japanese government's fiscal deficits. At the same time, the rapid fall in the household savings rate in the early 2000s coincided with an increase in corporate savings, such that there was a reversal of size between household savings and corporate savings. In terms of macroeconomic figures, the nation's main fund provider is the corporate sector.

In FY2013, the ratio of household savings against GDP declined from 0.6% in the previous year to -0.8%, whereas the ratio of corporate savings actually increased from 7.5% to 8.0%.

Although the ratio of private-sector savings, which is the combined total of household and corporate savings, against GDP edged down slightly due to the rapid drop in the household savings rate in FY2013, it has demonstrated amazing stability in the longer term. There was a clear downward trend until just after the collapse of the bubble economy. However, since the mid-1990s, the ratio remained stable at between 8% and 10% with the exception of FY2008, the year that Lehman Brothers collapsed.

For this reason, the future trend of corporate savings holds the key to answering the question of "whether it is possible to continue absorbing government bonds in the domestic market and avoid the skyrocketing of government bond yields." Unfortunately, modern economics does not have a convincing theory on corporate savings.

In a stance of extreme neoclassical economics, the household and corporate savings are completely interchangeable, as the wealth belongs to shareholders in the household domain in the end, even if corporate savings has the "corporate" veil on the surface. In other words, the total amount of private-sector savings is determined by household decision-making. According to this concept, Japan has seen hardly any decline in the savings rate over the last 20 years despite the aging population. This notion is, however, a little too extreme to say the least.

If greater emphasis is placed on the corporate domain as a decision-making entity, it should be noted that there is no guarantee that businesses would stay in Japan and continue financing and making up for the fiscal deficit. It is easy to imagine a scenario where Japanese companies, fed up with the government's inaction on the task of fiscal rebuilding, go offshore one after another, sending the nation's balance of payment into the red and triggering a serious fiscal crisis.

The same argument might apply to household behaviors, but the situation is more pressing for successful Japanese companies competing in the international markets.

♦  ♦  ♦

At the end of the day, the private-sector savings data that confront us today neither highlight nor deny the possibility of a future fiscal crisis. It is extremely unlikely that a crisis would fall upon us anytime soon. Yet, considering that Japan's balance of trade has been consistently in the red and that businesses continue to shift their production sites offshore despite the depreciation of the Japanese yen, we simply cannot completely rule out the chance that the private-sector savings, a kind of financial shock absorber that has been perceived as solid, might abruptly disappear.

The most desirable solution for the people of Japan clearly would be to bring about a significant increase in the economic growth rate, which would increase income and boost consumption and savings at the same time. However, there is no fail-proof economic measure. We must implement risk management in case that pump-priming measures fail to produce an outcome.

If the current approach to fiscal management continues without a sufficient recovery of the nation's growth rate, the probability of a fiscal crisis nearing reality will be in a matter of five years.

>> Original text in Japanese

* Translated by RIETI.

January 20, 2015 Nihon Keizai Shimbun

March 12, 2015

Article(s) by this author