Abstract
Although fiscal consolidation has short-term costs, the potential long-term benefits are considerable. Although adjustment is important for securing fiscal sustainability, reforms that raise potential growth could also support consolidation. Simulations show that the external environment also matters, but domestic policies should be the priority to raise medium-term growth. In Japan, public policies can help create an environment for more effective capital formation. For Japan, reforms to stimulate private consumption hold significant promise for boosting growth, and this could be achieved by boosting household disposable income.
III. Boosting Private Consumption in Japan1
A. Introduction
1. As part of a strategy for addressing pressures from an aging society and supporting needed fiscal consolidation, this chapter focuses on ways to boost private consumption in Japan. Private consumption is the largest component in GDP, but its growth has stagnated since the late 1990s. The key to reviving consumption is boosting household disposable income through higher wages, especially in services, and higher returns on savings. The next sections revisit the stylized facts on private consumption, examine drivers to spending, and conclude with possible policy options.
B. Stylized Facts of Private Consumption
2. Compared to G-7 countries, Japan’s private consumption share in GDP is low. Japan’s consumption share in GDP rose steadily from 53 percent in 1990 before peaking in 2002 at around 57 percent (Figure III.1). During the recent expansion phase (2003–07) the share fell slightly, with consumption growing at 5 percent compared to 10 percent for GDP. As of 2007, Japan’s consumption share was 4 percentage points below that of other G-7 countries, suggesting room for raising private consumption growth.
Private Consumption and Household Disposable Income
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Private Consumption and Household Disposable Income
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Private Consumption and Household Disposable Income
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
3. Sluggish consumption is not the result of rising household savings. To the contrary, the (aggregate) household saving rate has declined steadily since the early 1990s to around 2 percent in 2008 (Figure III.2), reflecting mainly population aging. Even for younger households, who might be expected to save more with a weak economy, saving has not increased since the early 2000s. The saving rates for those 30–39 years of age and below have remained stable, suggesting that saving is not contributing much to the stagnant consumption.
Household Saving Rate
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Household Saving Rate
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Household Saving Rate
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
4. Rather, private consumption has been closely tracking trends in household disposable income. Standard time series regressions confirm that at the aggregate level, Japan’s private consumption (share) is positively related to (cointegrated with) household disposable income and the old-age population ratio (Table III.1). The positive coefficient on the old-age population ratio is consistent with a prediction of a standard life-cycle model. In the regressions, output gap,2 the short-term interest rate, and CPI inflation are included as control variables (the latter two are in an alternative specification (second column in Table III.1).3 Similar to Japan’s time series regression, the results for a G-7 panel regression also find a significant positive impact of household disposable income on consumption.
Japan: Regression Results 1,2/
Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
The sample period is 1980–2005 except for missing observations.
Regression with level variables. All the variables expect for output gap and CPI growth are assumed to be cointegrated.
G-7 panel regressions are conducted by taking first differences because most of the variables are assumed to follow a unit-root process.
Japan: Regression Results 1,2/
| Japan 3/ | G-7 Panel 4/ | ||||
|---|---|---|---|---|---|
| Dependent variable: Private consumption (in percent of GDP) | |||||
| Household disposable income | 0.288** | 0.276** | 0.284*** | 0.282*** | |
| (in percent of GDP) | (0.136) | (0.123) | (0.0649) | (0.0675) | |
| Age>64 | 0.559*** | 0.539*** | -0.0729 | -0.0728 | |
| (in percent of total population) | (0.0676) | (0.0912) | (0.233) | (0.235) | |
| Output gap | -0.237*** | -0.265*** | -0.117** | -0.123** | |
| (0.0747) | (0.0676) | (0.0531) | (0.0587) | ||
| Short-term interest rate | 0.105 | 0.0163 | |||
| (0.0917) | (0.0473) | ||||
| CPI inflation | -0.263** | -0.0111 | |||
| (0.0942) | (0.0613) | ||||
| Constant | 29.30*** | 30.25*** | |||
| (9.093) | (8.587) | ||||
| Year dummy | No | No | Yes | Yes | |
| Num of Observations | 26 | 26 | 134 | 134 | |
| R^2 | 0.924 | 0.949 | 0.470 | 0.470 | |
Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
The sample period is 1980–2005 except for missing observations.
Regression with level variables. All the variables expect for output gap and CPI growth are assumed to be cointegrated.
G-7 panel regressions are conducted by taking first differences because most of the variables are assumed to follow a unit-root process.
Japan: Regression Results 1,2/
| Japan 3/ | G-7 Panel 4/ | ||||
|---|---|---|---|---|---|
| Dependent variable: Private consumption (in percent of GDP) | |||||
| Household disposable income | 0.288** | 0.276** | 0.284*** | 0.282*** | |
| (in percent of GDP) | (0.136) | (0.123) | (0.0649) | (0.0675) | |
| Age>64 | 0.559*** | 0.539*** | -0.0729 | -0.0728 | |
| (in percent of total population) | (0.0676) | (0.0912) | (0.233) | (0.235) | |
| Output gap | -0.237*** | -0.265*** | -0.117** | -0.123** | |
| (0.0747) | (0.0676) | (0.0531) | (0.0587) | ||
| Short-term interest rate | 0.105 | 0.0163 | |||
| (0.0917) | (0.0473) | ||||
| CPI inflation | -0.263** | -0.0111 | |||
| (0.0942) | (0.0613) | ||||
| Constant | 29.30*** | 30.25*** | |||
| (9.093) | (8.587) | ||||
| Year dummy | No | No | Yes | Yes | |
| Num of Observations | 26 | 26 | 134 | 134 | |
| R^2 | 0.924 | 0.949 | 0.470 | 0.470 | |
Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.
The sample period is 1980–2005 except for missing observations.
Regression with level variables. All the variables expect for output gap and CPI growth are assumed to be cointegrated.
G-7 panel regressions are conducted by taking first differences because most of the variables are assumed to follow a unit-root process.
C. Drivers of Private Consumption
5. The main components of household disposable income—wages and property income—have stagnated in Japan. Wages declined by 3 percent between 2000–07 in nominal terms, while household property income fell 14 percent during this period. Credit and equity financing can also support consumption, but these remain limited in Japan.
Wages
6. Sluggish wages reflect both global and Japan-specific factors. The share of wages in GDP has fallen from 47 percent in 1995 to 44 percent in 2007 owing to both global and Japan specific factors (Sommer, 2009). The key global factors may include technological changes, such as greater use of information technology that reduce demand for low-skilled workers, and globalization pressures that push firms to be more sensitive to international wages. The large gap in productivity growth between the services and manufacturing sectors may also have depressed overall wage growth, given productivity’s link to wages. 4
Wages and Salaries
(In percent of GDP)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: National Accounts.Wages and Salaries
(In percent of GDP)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: National Accounts.Wages and Salaries
(In percent of GDP)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: National Accounts.7. The increasing share of nonregular workers may also have played a role in depressing wages (Sommer, 2009). Deregulation measures in the 1990s that expanded the list of industries contributed to an increase in the share of nonregular workers to 30 percent in 2009 from 15 percent in 1995. This may have put downward pressures on aggregate wages. In addition, strong employment protection for regular workers may have limited competition and productivity growth, holding back wages.
Trend in Non-regular Workers
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Ministry of Internal Affairs and Communications.1/ Contract employee is included in Other before 2002.Trend in Non-regular Workers
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Ministry of Internal Affairs and Communications.1/ Contract employee is included in Other before 2002.Trend in Non-regular Workers
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Ministry of Internal Affairs and Communications.1/ Contract employee is included in Other before 2002.Property Income
8. After Japan’s asset bubble collapse around 1990, household property income steadily declined (Figure III.3). The declining share of household property income was led by the fall in both interest and dividend income following the economic slump of the 1990s. Household property income recovered in the early 2000s along with the economic rebound, but remained low at only about 4 percent of household disposable income in 2007, compared with 20 percent in the United States (U.S.) and well below that of other G-7 economies.
Household Property Income
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Household Property Income
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Household Property Income
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
9. A key reason for low property income in Japan is the small share of risky assets in household’s balance sheets. At the aggregate level, risky assets (shares, equities, and trusts) account for only 10 percent of the overall financial assets in Japan—significantly lower than the 40 percent share in the U.S. Micro data point to a similar pattern, with households in the U.S. holding more risky assets than in Japan at all ages (Figure III.4). In Japan, the high share of deposits and currency, which account for nearly 60 percent of financial assets and earn a low rate of returns over the past decade (typically less than 0.5 percent), have depressed property income.
Household Financial Assets1/
(In percent)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Koike (2009).1/ As of end 2008.Household Financial Assets1/
(In percent)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Koike (2009).1/ As of end 2008.Household Financial Assets1/
(In percent)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Koike (2009).1/ As of end 2008.
Household Financial Assets: Japan and U.S.
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Household Financial Assets: Japan and U.S.
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Household Financial Assets: Japan and U.S.
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
10 In Japan, the low share of risky assets may be attributed to regulatory, economic, and social factors.5
Past financial regulations. Until the late 1990s, relatively tight restrictions on investments in risky assets, such as on foreign currency deposits,6 likely discouraged households from investing in such assets. Even when most regulatory impediments to holding risky assets were removed in the wake of the “financial big bang” in 1998, households’ risk appetite increased only slightly. Moderate adjustment costs, including high fees, for example, on trusts (Faulkner-MacDonagh and Nakagawa, 2007), were also responsible for the slow portfolio shifts, leaving the share of risky assets at a low level.
Lower stock returns. Lower stock returns, compounded by smaller dividend payouts, have not only been a drag on property income, but may also have depressed demand for stocks and trusts. Dividend payments in Japan are particularly small by international standards (Figure III.5), with stock dividend yields remaining lower than 10-year JGB yields throughout the 2000s.7 Even during the boom years between 2003 and 2007 when corporate profits were substantial, dividend payouts were only 2½ percent of GDP, compared to 5– 10 percent of GDP in other G-5 economies. During this period, corporates were either retaining a large part of their profits as cash (deposits) or using them to pay down debt, resulting in record high financial surpluses.
The dividend payout ratio of nonfinancial corporations has recently risen to about 15 percent, but is still well below the G-7 average (50 percent). The low ratio could partly be attributed to large crossholdings of stocks, which encourage companies to retain profits.8 However, in recent years, Japanese banks and nonfinancial corporations have been unwinding the crossholdings, possibly leading to a pickup in the payout ratio.
Expensive housing. Historically, housing prices have been higher in Japan than in advanced economies, perhaps discouraging investments in risky financial assets with housing as a close substitute.9 Housing assets were nearly 300 percent of household disposable income in Japan in 2000, compared to about 150 percent in the U.S. (Babeau and Sbano, 2003). Expensive and risky housing purchases may have encouraged Japanese homeowners to accumulate more safe liquid assets to balance their overall asset portfolio. Expensive houses may also have forced young households to increase cash and deposit saving more aggressively to finance large initial down payments. The observation that households in Japan start to increase their share of risky assets (stocks and trusts) at a later stage in life than in the U.S. (Figure III.4) is consistent with these arguments.
Preferences. Although it is hard to formally test preferences, survey results suggest that Japanese households are more risk-averse than those in the U.S.10 The collapse of the bubble in the early 1990s may have changed household’ perceptions about stocks and strengthened risk aversion among Japanese households,11 partly offsetting the impact of financial deregulation.
Corporate Dividend Payout
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Corporate Dividend Payout
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Corporate Dividend Payout
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Japan: Household Financial Assets
(In percent, end of period)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: BoJ’s flow of funds statisticsJapan: Household Financial Assets
(In percent, end of period)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: BoJ’s flow of funds statisticsJapan: Household Financial Assets
(In percent, end of period)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: BoJ’s flow of funds statistics
Financial Surpluses of the Corporate Sector
(In percent of GDP)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: BoJ’s flow of funds statisticsFinancial Surpluses of the Corporate Sector
(In percent of GDP)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: BoJ’s flow of funds statisticsFinancial Surpluses of the Corporate Sector
(In percent of GDP)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: BoJ’s flow of funds statisticsDebt or equity financing
11. Japanese households have not been actively engaged in debt or equity financing. Possible reasons include:
Consumer credit. Consumer credit in Japan is smaller than in the U.S. (10 percent of GDP and 25 percent of GDP, respectively). In addition, the distribution of credi availability in Japan is concentrated among low-risk and high-risk borrowers, with limited credit extended in between—so called the “middle-risk” gap—who may benefit from the ability to smooth intertemporal consumption. This is partly due to the lack of a comprehensive credit information system for assessing credit risk, similar to the credit bureaus in the U.S. Other factors behind the limited consumer credit may include household’ strong aversion to consumer credit and the stigma attached to borrowing from a consumer finance company. 12
Reverse home mortgage.13 Markets for reverse home mortgages virtually do not exist in Japan, perhaps constraining the ability of the elderly to spend their housing capital gains.14 Starting in the 1980s, many local governments launched reverse home mortgages, but these failed to take hold. Lack of risk management mechanisms and illiquid markets for used housing have discouraged financial institutions from providing reverse home mortgages. On the borrowers’ side, favorable tax treatment on land encourages the elderly to leave housing as a bequest in their wills instead of selling.15 Another important factor is that few elderly people know about reverse home mortgages (only 20 percent in 2005, according to the Cabinet Office).
Outstanding Consumer Credit in 2008
(In percent of household disposable income)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Flow of Funds statistics and National Accounts.Outstanding Consumer Credit in 2008
(In percent of household disposable income)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Flow of Funds statistics and National Accounts.Outstanding Consumer Credit in 2008
(In percent of household disposable income)
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Flow of Funds statistics and National Accounts.D. Policy Implications
12. Reviving private consumption will require a combination of reforms aimed at boosting wages, generating higher returns on savings, and improving household access to financing. Possible measures include:
Boosting wage growth
Service productivity. Accelerating labor productivity growth in the services sector, which has been lagging that in the manufacturing sector, would lift wages. In this respect, further regulatory reforms, such as in health care, could be pursued.
Labor market reform. Greater labor flexibility could lift wages through higher employment and productivity. One way would be to introduce a new regular contract with weaker employment protection that could encourage firms to hire more regular workers. This may not only give more incentives workers to accumulate human capital, helping raise productivity and returns, but also address concerns about equity between regular and nonregular workers. Such a contract would need to allow grandfathering of existing permanent contracts to mitigate uncertainty about employment prospects.
Diversifying portfolios
Stock returns. Continued unwinding of cross-shareholdings could encourage greater dividend payout.16 Deregulations to raise productivity could also strengthen firm’ profitability and improve stock returns, stimulating demand for risky assets.
Incentives for holding non-deposit financial assets, such as a reduced tax rate on dividend income, could be extended (currently, the tax rate on dividend income from listed stocks is reduced to 10 percent from 20 percent, but this is scheduled to be terminated at end-2011).
Improving access to credit or equity financing
Consumer credit. Access to consumer credit could be improved through greater sharing of credit information between banks and non banks.17 Since demand for consumer finance is concentrated among low-wealth households, the aggregate impact of relaxing their liquidity constraint or reducing precautionary savings, however, might be limited.
Reverse home mortgages. Given the rapid population aging, reverse home mortgages may have potential for stimulating consumption, as a larger fraction of the elderly are homeowners compared to the young. In light of significant risks for banks associated with providing reverse home mortgages, public assistance may be needed to jump-start this market, for example, by supplying insurance (to banks) through a government affiliated financial institution as done in the U.S. Deepening markets for used housing help banks to more easily sell houses they accept.
Japan: Share of Homeowners by Age1/
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Household Survey (Statistical Bureau, Ministry of Internal Affairs and Communications).1/ Cover two-or-more-person households as of 2008 (period average).Japan: Share of Homeowners by Age1/
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Household Survey (Statistical Bureau, Ministry of Internal Affairs and Communications).1/ Cover two-or-more-person households as of 2008 (period average).Japan: Share of Homeowners by Age1/
Citation: IMF Staff Country Reports 2010, 212; 10.5089/9781455207886.002.A003
Source: Household Survey (Statistical Bureau, Ministry of Internal Affairs and Communications).1/ Cover two-or-more-person households as of 2008 (period average).13 Finally, steps to strengthen the social security system would help reduce household’ precautionary savings. Murata (2003) provides evidence for the existence of precautionary savings that stem from concerns about future public pension benefits. Ongoing reforms to enhance the reliability of the public pension system and efforts to improve the government fiscal positions would lessen uncertainty about household’s future income prospects.
E. Conclusion
14 For Japan, reforms to stimulate private consumption hold significant promise for boosting growth. This could be achieved by boosting household disposable income through higher productivity growth and returns, combined with steps to facilitate shifts in household balance sheets.
References
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Prepared by Kiichi Tokuoka.
According to a standard representative agent model, consumption (level) responds only modestly to output gap (level) because a temporary shift in output has a limited impact on lifetime income that determines consumption. Such a response implies a negative correlation between the consumption share in GDP and output gap.
As discussed in Edison (2005), CPI inflation could affect consumption independently from its influence via the real interest rate. For example, CPI inflation could capture the effect of uncertainty.
Morikawa (2006) presents evidence that productivity growth in the manufacturing sector has tended to be higher than that in the services sector across advanced economies.
In addition to the factors listed here, Matsuura and Shiraishi (2004) argue that the age-based remuneration system, which is prevalent in Japan, could reduce holdings of risky assets. Under this system, young employees receive lower wages relative to their performance, leaving their future wages as effectively risky financial assets. These assets are subject to the uncertainty surrounding the lifetime employment system, which could encourage young workers to hold disproportionally more safe assets.
Until the late 1990s, commercial banks were not allowed to provide trusts or foreign currency deposits to households.
Stock returns including capital gains have been generally lower than 10-year JGB yields throughout the post-bubble period (Matsuura and Shiraishi, 2004).
Historically, the large crossholdings may have been easing pressures against corporates to enhance their profitability and pay out more of their profits.
See, for example, Iwaisako (2003).
According to Nakagawa and Shimizu (2000), the percentage of Japanese households that consider safety in financial investment to be of the utmost importance is as high as 44 percent—more than 15 percentage points higher than households in the United States.
Using the U.S. data, Malmendier and Nagel (2009) find evidence for the idea (originally suggested by Ameriks and Zeldes, 2004) that those who have experienced lower stock returns in their lifetime are less likely to hold stocks.
Over-borrowing from consumer financing companies has been described as the “hell of consumer financing” (or “Sarakin Jigoku” (in Japanese)) and has long been an important social problem. In response, the government has passed legislation that caps interest rates and limits borrowing to one third annual income.
A reverse home mortgage is a loan against housing equity. A resident does not have to repay the loan or move out of his home until he or she dies.
By contrast, in the U.S., the number of new reverse home mortgage contracts under the public Home Equity Conversion Mortgage system has reached 100,000 a year, up from below 10,000 in 2000 (FHA Outlook, 2010).
Some may argue that stronger bequest motives in Japan could prevent homeowners from applying for reverse home mortgages. However, empirical evidence suggests that bequest motives are weaker in Japan than in the U.S. (Horioka and others, 2001).
Cross-shareholdings are being unwound particularly by banks that aim to reduce market risks.
Under the revised Money Lending Act, credit information agencies (to which consumer finance companies report) have the obligation to share information on consumer credit with each other, but not to commercial banks.
