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Japan’s Savings Crisis

CAMBRIDGE – Japan is heading toward a savings crisis. The potential future clash between larger fiscal deficits and a low household saving rate could have powerful negative effects on both Japan and the global economy.

First, some background. Japan was long famous for having the highest saving rate among the industrial countries. In the early 1980’s, Japanese households were saving about 15% of their after-tax incomes. Those were the days of sharply rising incomes, when Japanese households could increase their consumption rapidly while adding significant amounts to their savings. Although the saving rate came down gradually in the 1980’s, it was still 10% in 1990.

But the 1990’s was a decade of slow growth, and households devoted a rising share of their incomes to maintaining their level of consumer spending. Although they had experienced large declines in share prices and house values, they had such large amounts of liquid savings in postal savings accounts and in banks that they did not feel the need to increase saving in order to rebuild assets.

A variety of forces have contributed to a continuing decline in Japan’s household saving rate. The country’s demographic structure is changing, with an increasing number of retirees relative to the workers who are in their prime saving years. Surveys tell us that younger Japanese are more interested in current consumption and less concerned about the future than previous generations were. And the traditional notion of saving for bequests has waned.