Editorials

Negative savings rates loom

The first-ever plunge in Japan’s household savings rate into negative territory in fiscal 2013 might have been a temporary phenomenon caused by people’s rush to buy goods before the consumption tax hike last April.

Yet, the long-term downtrend in the savings rate is set to continue as the aging of the Japanese population progresses. Whether that results in Japan becoming unable to finance its own debt and having to rely on funds from overseas will depend a lot on the corporate sector, which has been building up its cash and savings in recent years.

The savings rate, or the share of savings as a percentage of total disposable income of households, dipped from 0.9 percent in fiscal 2012 to minus 1.3 percent in the year to last March — the first time since the government started taking comparable data in 1955.

The negative rate means that people on average consumed more than they earned. According to the Cabinet Office data released at the end of December, the 0.5 percent rise in total household income to ¥285.5 trillion was outpaced by a 2.7 percent increase in spending to ¥289.2 trillion, with people estimated to have tapped into their savings by ¥3.7 trillion.

The increase in fiscal 2013 spending is attributed to the rise in consumer demand before the consumption tax rate was hiked from 5 percent to 8 percent in April. The savings rate may pick up again into the positive territory once this special factor wears off. However, the rate has decreased since the 1970s — a trend forecast to continue over the long term.

Japan used to have one of the world’s highest savings rates. When its large trade surpluses became a source of friction with trading partners in the 1980s, its savings rate was even singled out for criticism — that Japan’s imports did not increase because the Japanese didn’t spend enough. But the savings rate has in fact been falling since hitting a peak of 23.1 percent in 1975, and has been hovering between 5 percent and zero since the turn of the century.

Behind the decline is the rapid aging of Japan’s population. People typically live off their savings after retirement, and the rate of household savings naturally falls as retirees account for a greater portion of the population. Today, one in every four Japanese are 65 or older, and their portion of the population is expected to rise further amid the low birthrate. The negative savings rate may be the norm in years to come.

Businesses borrow from household savings through banks to make investments, and household savings also pay for government bonds issued to cover revenue shortfalls. The nation had a record ¥1,654 trillion in household financial assets as of the end of September, which increased 2.7 percent from a year ago as the rise in share prices pushed up assets.

But the prospect of a negative savings rate as a long-term trend raises the question whether Japan can continue to cover the government bonds issued in massive volumes each year with domestic funds — or be forced to start relying on overseas funds to pay its debts.

Consumer spending accounts for 60 percent of the nation’s gross domestic product. A full-scale recovery in the Japanese economy will require a pickup in private consumption, which has slumped since the consumption tax hike as prices rose faster than wages. But an increase in consumer spending without a matching rise in income will push down the savings rate even further.

The corporate sector, meanwhile, has been saving more and spending less as businesses have curbed investments and kept lids on wage hikes since the economic doldrums began in the 1990s. Japan’s nonfinancial firms held ¥233 trillion in cash and savings as of September, according to Bank of Japan statistics. Whether Japan can continue to service its own debt may depend on how businesses use their savings.

Companies need to reflect on the impact of their excess savings on the economy. They could promote self-sustained economic growth by investing more and raising workers’ wages more sharply than prices are rising so that people can spend more without tapping into their savings. The downtrend in the household savings rate has accelerated since the late 1990s as people’s wages declined. Economic growth ignited by wage increases will increase tax revenue. The increased tax revenue should enable the government to reduce its reliance on debts to cover its expenses, making it easier to keep financing bonds even as the household savings rate falls.

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