Consumption and the Effects of Wealth: Examining the Household Balance Sheet Problems

ABSTRACT

The cause of consumer stagnancy is rooted in the problems of the household balance sheet. These problems have at once to do with supply, a shortage of products and services that meet the needs of the consumer, expectation, a drop in the expectations for future income, and psychology, a rise in consumer anxiety about the future. It is particularly important to think about the problems of the household balance sheet from the perspective of deflation, what is potentially Japan's largest economic problem. For example, the way rises in the real value of debt caused by deflation leads to restraint in indebted consumers, or the way the drop in asset prices caused by asset deflation leads to a negative wealth effect in consumers are important points to look at.

With these issues in mind, the following report examines the influences of the wealth effect and the negative wealth effect upon consumption. It will examine the extent of symmetry in these two effects, as well as the differences in the wealth effect caused by different types of assets. This study is based on a survey conducted at the Fujitsu Research Institute.

The analysis yielded the following implications:

Consumers with household loans are more constrained than consumers with no household loans, a fact that bears relation to the current economic stagnation.

The consumption of households with loans that exceed two times the amount of their annual income is much more sensitive to changes in the economy than households with loan balances below two times the annual income. Due to the drop in income and the drop in expected future income caused by the recent economic slump, the former are currently constraining their consumption more than the latter

Changes in the value of real estate do not necessarily cause large changes in household consumption. However, consumer reaction is much more sensitive when the value drops than when the value rises, evidence that the wealth effect and the negative wealth effect are asymmetric.

Changes in the value of stock assets affect the consumption of household accounts more than changes in the value of real estate. Moreover, the wealth effect of stocks is not necessarily proportional. Its level of symmetry changes depending on the amount of money; the larger the amount, the less the symmetry.