Transformation of the Flow of Funds Structure and Household Savings in an Aging Society

ABSTRACT

Japan is rapidly becoming an aging society in a way that we have never experienced before. Moreover, while Japan’s household savings rate was at a high level among G7 countries in the beginning of 1980, it now belongs to the lowest group. According to the “lifecycle hypothesis”, the progression of an aging society pushes down the macro-based household savings rate. By estimating a household savings rate function using data since the 80s, it was found that the aging society is indeed having an extremely strong effect.

Behind household savings are fund management and procurement of household finances. The surplus of household finances, after subtracting procurement from management, has decreased dramatically since the mid-90s, and now stands at an extremely low level of 1–2% of the nominal GDP. The household sector cannot now be called a financial surplus sector. The traditional structure of excessive household savings, a typical characteristic of the Japanese economy, being balanced out by over-investment from companies is now undergoing a significant shift.

The Abe Administration introduced a new mid-term policy called “The Course and Strategy of the Japanese Economy” at the economic advisory council held in January of this year. Based on macro-economic predictions assumed by this “Course and Strategy”, when predicting the transition of the household savings rate over the next five years it seems that it will dip into the negative after 2010. On the other hand, the flow of funds structure assumed by the “Course and Strategy” over the next five years has the decrease in the household sector surplus being entirely covered by the corporate sector. However, as the Japanese economy steadily follows its course of economic recovery, doubt remains over whether it is possible to maintain the financial surplus of the corporate sector in the future.

If we assume that a drop in the household savings rate based on the aging of society is basically unavoidable, then the remaining option is to eliminate wasteful use of savings (as a scarce resource), and strive to improve the per capita income level by making the economy more efficient and streamlined. The Abe Administration should make such economic goals clear as the consensus of citizens.