Appendix: Data Appendix
This Appendix provides the definitions of the variables used in the text and their data sources.
Household savings rate = (household disposable income - household consumption expenditure)/household disposable income × 100. The data are obtained from the Annual Report on National Accounts (1985) and Keizai Hakusho (1982).
Real disposable income = household disposable income/the deflator of household final consumption expenditure. The data are obtained from the Annual Report on National Accounts (1985).
Inflation rate (T) = (the deflator of household final consumption expenditure (T)/the deflator of household final consumption expenditure (T-1) - 1) × 100. The deflators are obtained from the Annual Report on National Accounts (1985).
Bonus ratio = temporary salary and bonuses/(temporary salary and bonuses + regular salary) × 100. The data are obtained from the Annual Report on the Family Income and Expenditure Survey (1983).
Tax exemptions ratio = (ceiling limits - average household deposits)/average household disposable income. The ceiling limits are defined as the sum of the ceiling limits on the Maru-Yu and the postal savings tax exemptions. They are obtained from the Savings and Savings Promotion Movement in Japan (1982). The average household deposits are defined as the sum of the average time deposits (at banks, post offices and others) and the average demand deposits (at post offices). They are obtained from the Report on the Family Saving Survey (1984). The average household disposable incomes are obtained from the Annual Report on the Family Income and Expenditure Survey (1983).
Pension ratio = pension benefits/household disposable income. The pension benefits are defined as the sum of the Employee’s Pension (Kosei Nenkin) and the People’s Pension (Kokumin Nenkin). The data are obtained from the Annual Report on National Accounts (1985).
Land price ratio = the residential land price index/household disposable income. The residential land price index (1955=100) is used as a proxy for the tangible wealth because residential land acounts for most of the tangible wealth held by the Japanese households. The data are obtained from the Japan Statistical Year Book (various issues) and the Annual Report on National Accounts (1985).
Blumenthal, Tuvia, Saving in Postwar Japan, Harvard East Asian Monograph, No. 35 (Cambridge, Massachusetts: East Asian Research Center, Harvard University, 1970).
Central Council for Savings Promotion, Public Opinion Survey on Savings (Tokyo: Central Council for Savings Promotion, various issues).
Central Council for Savings Promotion, Savings and Savings Promotion Movement in Japan (Tokyo: Central Council for Savings Promotion, 1982).
Hamada, Koichi, and Yoshio Kurosaka, Makuro-keizai-gaku to Nihon Keizai (Macroeconomics and the Japanese Economy) (in Japanese) (Tokyo: Nihon Hyoron-sha), pp. 103–121.
Hayashi, Fumio, “Why is Japan’s Saving Rate so Apparently High?” in Stanley Fischer ed., NBER Macroeconomics Annual 1986 (Cambridge Massachusetts: The MIT Press, 1986), pp. 147–210.
Heller, Peter, Richard Hemming, and Peter Kohnert, “Aging and Social Expenditure in the Major Industrial Countries, 1980-2025,” Occasional Paper No. 47 (Washington: International Monetary Fund, 1986).
Horioka, Charles, “The Applicability of the Life-Cycle Hypothesis of Saving to Japan,” The Kyoto University Economic Review, Vol. LIV, No. 2 (October 1984).
Horioka, Charles, “Why is Japan’s Private Savings Rate So High?” DM/86/44 (Washington, D.C.: International Monetary Fund, June 1986).
Ishikawa, Tsuneo, and Kazuo Ueda, “The Bonus Payment System and Japanese Personal Savings,” in Masahiko Aoki, ed., The Economic Analysis of the Japanese Firm, Contributions to Economic Analysis Series, No. 151 (Amsterdam: North-Holland, 1984), pp. 133–92.
Kotlikoff, Laurence, and Avia Spivak, “The Family as an Incomplete Annuities Market,” Journal of Political Economy, vol. 89, No. 2 (April 1981), pp. 372–91.
Makin, John, “Saving Rates in Japan and the United States: The Roles of Tax Policy and Other Factors” (manuscript prepared for the Savings Forum in Philadelphia, May 2-3, 1985).
Modigliani, Franco, The Collected Papers of Franco Modigliani (Volume 2, The Life-Cycle Hypothesis of Savings), ed. by Andrew Abel, (Cambridge, Massachusetts: The MIT Press, 1980).
Modigliani, Franco, “Life Cycle, Individual Thrift, and the Wealth of Nations,” The American Economic Review, vol. 76 (June 1986), pp. 297–313.
Prime Minister’s Office, Statistics Bureau, Annual Report on the Family Income and Expenditure Survey (Tokyo: Japan Statistical Association, 1982).
Sato, Kazuo, “Japan’s Savings and Internal and External Macroeconomic Balance,” in Policy and Trade Issues of the Japanese Economy, ed. Kozo Yamamoto (Seattle: University of Washington Press, 1982), pp. 143–72.
Shiba, Tsunemasa, “The Personal Savings Function of Urban Worker House holds in Japan,” Review of Economics and Statistics, vol. 61 (May 1979), pp. 206–13.
Shinohara, Miyohei, “The Determinants of Post-War Savings Behavior in Japan,” in Franco Modigliani and Richard Hemming, eds., The Determinants of National Saving and Wealth (Proceedings of a Conference held by the International Economic Association at Bergano, Italy) (London: The Macmillan Press Ltd., 1982), pp. 201–218.
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)| false “ Shinohara, Miyohei, The Determinants of Post-War Savings Behavior in Japan,” in Franco Modiglianiand Richard Hemming, eds., The Determinants of National Saving and Wealth( Proceedings of a Conference held by the International Economic Associationat Bergano, Italy) ( London: The Macmillan Press Ltd., 1982), pp. 201– 218.
Shoji, Nobuo, “Kojin-Shohi to Sono Patan” (Personal Consumption and its Pattern), in Japan Economic Research Center, ed., For the Realization of Medium-Term Stable Growth: The 3rd Interim Report on Medium-Term Economic Projections (Tokyo: Japan Economic Research Center, 1976), pp. 143–80.
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)| false “ Shoji, Nobuo, Kojin-Shohi to Sono Patan” (Personal Consumption and its Pattern), in Japan Economic Research Center, ed., For the Realization of Medium-Term Stable Growth: The 3rd Interim Report on Medium-Term Economic Projections( Tokyo: Japan Economic Research Center, 1976), pp. 143– 80.
An earlier version of this paper was drafted while I was in the Asian Department. I am grateful for comments and suggestions received from Donald Mathieson, Peter Isard, Charles Horioka, Louis Mendras, and other members of the Research and Asian Departments.
See Modigliani (1980), which presents a collection of both theoretical and empirical papers on the life-cycle hypothesis of savings. See also Modigliani (1986) for a brief summary of the implications of the life-cycle hypothesis. Although the present model is based on Modigliani’s life-cycle hypothesis of savings, it differs from his models in many specifics.
In this paper, the life-cycle hypothesis refers to the original hypothesis that the primary motive for savings is provision for retirement, and not to Modigliani’s propositions derived from his life-cycle models. Many of Modigliani’s propositions are derived under the steady-state assumption, and therefore are not necessarily valid in the context of economic and demographic developments. Thus, empirical findings that contradict Modigliani’s propositions do not necessarily indicate the deficiency of the life-cycle hypothesis per se, but often the inadequacy of his steady-state assumption (see Section II). This point is particularly important when the life-cycle hypothesis is applied to Japan because that country has been going through dramatic economic and demographic changes.
Sato (1982) discusses the relationship between Japan’s investment-savings gap and external imbalance.
Japan will not reach a demographic steady-state, which is necessary for Modigliani’s proposition to hold, until year 2020 (see Table 3).
Shoji (1976) has shown, and my preliminary regressions have also strongly confirmed, that Japan’s savings rate is strongly related to the level of income, but not to the rate of income growth. Moreover, neither the upward trend in the savings rate before 1974 nor the downward trend after 1974 can be explained by the sudden and permanent drop in the rate of income growth in 1974 (from 10 percent to 3 percent), which would have caused, at best, a once-and-for-all decline in the savings rate after 1974. Since this did not happen (see Figure 1), the rate of income growth cannot explain the time-series behavior of the savings rate.
Horioka (1984) lists several reasons for the prevalence of such implicit loan contracts: the elderly’s risk aversion for uncertain lifespan, the difficulty of liquidating the elderly’s assets in the form of land and housing, and so on. See also Kotlikoff and Spivak (1981), which provides an analysis of the role of the family as an annuity market.
During the postwar period, the bequest motive should have been on the wane along with a gradual breakdown of the extended family structure in Japan. Thus, Hayashi’s claim is not consistent with the observed upward movement of the savings rate (until the mid-1970s) and the gradual breakdown of the extended family structure during the postwar period.
The life-cycle hypothesis implies that the household smooths out consumption expenditures over lifetime. Thus, the household’s decision problem can be formulated as choosing between the relative retirement period (R/L) and the annual level of consumption (C/L) subject to the lifetime budget constraint:
max U(C/L, R/L) subject to C/L = RDI×(1 - R/L)
where C/L and R/L are assumed to be both normal goods. In this formulation, RDI can be viewed as the (average) annual wage rate. It is easy to show, under standard conditions, that ∂(R/L)/∂RDI is positive if and only if the wealth effect outweighs the substitution effect.
Prime Minister’s Office, Statistics Bureau, Japan Statistical Yearbook (1985), p. 110.
Ibid., p. 55. During 1960-83, about 96 percent of “formal” retirement ages in Japan remained between 55 and 60 with a slight increase in the average “formal” retirement age (ibid., p. 82). In Japan, however, most people who had “formally” retired traditionally worked some additional years at reduced wages or entered another occupation. It is thus plausible that business firms have simply adjusted their “formal” retirement ages so as to more appropriately reflect “actual” retirement ages, while Japan’s “actual” average retirement age has remaind the same or has even declined. In any case, there seems to be little doubt that the relative retirement period has increased steadly in modern Japan, along with dramatic increases in life expectancy (cf. Section III.3).
It does not make any practical difference whether we use real income or real income per capita because they are almost perfectly collinear.
It has been said that the influence of a public pension system on the savings rate is ambiguous because it may encourage earlier retirement, thereby offsetting its negative influence on the savings rate. In Japan, however, there is little evidence for a fall in the average retirement age during the last several decades. In any case, if the public pension system were to induce earlier retirement, the estimated coefficient of the pension ratio should show a deviation from minus one toward zero. Thus, we can test whether there is any induced retirement effect by looking at the estimated coefficient of the public pension ratio.
This follows from the two lemmas that public pension benefits are a perfect substitute for personal savings and that retired pension recipients still consume but no longer save. Both lemmas are implied by the life-cycle hypothesis that the primary motive for savings is provision for retirement. The Japanese survey data on family income and expenditure reveal relative stability of the savings rate over different family-head age groups. This, however, is due to the fact that middle-aged families typically include their retired parents. Thus, the reported savings rate of middle-aged families is a mixture of those of working and retired households.
To the extent that the two ratios do not move together or move in opposite directions, the estimated coefficient of the public pension ratio should neither exhibit statistical significance nor have the predicted value (about minus one). Thus, if the estimated coefficient turns out to be statistically significant and have the predicted value, then it will support my arguments.
Land accounts for about 80 percent of the tangible assets owned by the Japanese households (see the stock section of Annual Report on National Accounts by Economic Planning Agency). Moreover, residential land accounts for most of the total land value, and its price changes (often due to nation-wide land speculation) have been the major source of changes in the value of the tangible assets.
There are several reasons that we use the (residential) land price index as a proxy for the value of tangible assets. The first is that land is a major part of the household tangible assets. The second is that accurate data on the tangible assets are not available (for example, Economic Planning Agency’s Annual Report on National Accounts does not have data on tangible assets before 1969). The last, but not the least, reason is that we would like to test a competing housing-price hypothesis, which is discussed below, that an increase in the residential land price induces the Japanese households to save more for their housing purchase.
Central Council for Savings Promotion, Public Opinion Survey on Savings (various issues).
Prime Minister’s Office, Annual Report on the Family Income and Expenditure Survey (various issues).
The relative illiquidity of housing and land has been cited as one of the reasons for the extended family structure and the implicit loan contract between the elderly and their children as a means to finance expenditures during retirement (see Section II).
Precisely speaking, the financial target ratio a depends on the inflation rate π through its rate-of-return effect. As a linear approximation, however, the introduction of this element does not alter the final specification A(π - Eπp) in the text, where A is a constant.
This assumption is realistic in the case of Japan because the excess growth rate of money supply has shown little variation over the years (with a notable exception during 1972-73). Consequently, the value of β (see below) must have been relatively large during the sample period 1965-83.
The nominal interest rate was regulated during most of the sample period, and was very slow to adjust to inflation. Consequently the movement of the real interest rate was dominated by inflation.
The use of this ratio as a measure of the tax exemptions was suggested to me by Charles Horioka.
This enables us to perform “non-nested hypothesis tests” (our life-cycle theory vs the institutional theory).
Because lagged values of some explanatory variables are used in the first-stage estimation, the sample period for the final second-stage estimation is from 1966 to 1983.
The “predetermined” variables include a constant term; a trend; the one-period lagged values of real household disposable income, the inflation rate, the rate of exchange rate changes, the bonus ratio, the land price ratio; the current and the one-period lagged values of the oil price inflation rate in terms of the Japanese yen; and the oil crisis dummy with zero before 1973 and one after 1974. The exchange rate changes and the oil price inflation rates are calculated from International Financial Statistics (IMF). The data sources of other variables can be found in the Data Appendix of this paper.
The OLS estimation of Regression 1 (Table 2) yields a positive coefficient (0.129) with a statistically insignificant t-value (0.33). This estimated coefficient suggests that the bonus system accounts for about 3 percentage points of the Japanese household savings rate, which is very similar to the figure estimated by Ishikawa and Ueda (1984) who also used the OLS estimation method. The present regression results obtained by the 2SLS estimation method indicate that this alleged contribution of the bonus system is entirely due to the simultaneity problem between the savings rate and the bonus ratio. In other words, the OLS estimation has picked up a positive cyclical comovement between the two variables during the business cycle.
Makin (1985) reaches a similar conclusion on the small positive (or even negative) interest elasticity of Japanese savings. The use of the real interest rate in place of the inflation rate affects the regression results very little because inflation has dominated the movement of the real interest rate during the sample period. Moreover, the use of the inflation rate is more consistent with the life-cycle hypothesis of savings.
This conclusion is consistent with our earlier finding about the small interest elasticity of Japan’s household savings.
As can be expected, the null hypothesis that the coefficients of the wealth variables, which are also suggested by the life-cycle hypothesis of savings, are zero in addition to those of the main life-cycle factors is much more easily rejected.
Prime Minister’s Office, Statistic Bureau, Japan Statistical Year Book (1985: p. 55).
In Japan, a “formal” retirement age ranges between 55 and 60 (ibid., p. 55). In reality, however, most people who had “formally” retired typically worked some years at reduced wages or entered another occupation. Horioka (1984), for example, reports that about half of the aged 65 to 69 were still in the labor force. The “actual” average retirement age, therefore, may reasonably be assumed to have been 65.
The use of Regression 1 or 3, instead of Regression 2, does not substantially affect any of the main results of this section.
The ratio of tangible wealth (land) to disposable income had shown an-upward trend until the mid-1960s. Since then, however, its trend appears to have stabilized and the ratio has been characterized more by medium-term variations than the trend movement (Table 1).
The savings rate will be higher only by 0.6 perentage points even as-late as 2030. The difference is, of course, less than this figure before 2030.
The values of π and Eπp do not need to be specified for the projections because they cancel out each other under the assumption of no unexpected inflation. But, the value of Eπp during the sample period needs to be specified in order to obtain the value of b0, which is used in the projections.