Japan heading into savings crisis

Editorial, Normal


JAPAN is heading towards 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 1980s, 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 1980s, it was still 10% in 1990.
But the 1990s 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.
The traditional notion of saving for bequests has waned.
The household saving rate therefore continued to fall until it was below 5% at the end of the 1990s and reached just above 2% last year.
At the same time, the fiscal deficit is more than 7% of GDP.
The combination of low household saving and substantial government dissaving would normally force a country to borrow from the rest of the world.
However, Japan maintains a current-account surplus and continues to send more than 3% of its GDP abroad, providing more than US$175 billion of funds this year for other countries to borrow.
This apparent paradox is explained by a combination of high corporate saving and low levels of residential and non-residential fixed investment.
In short, Japan’s national savings still exceed its domestic investment, allowing Japan to be a net capital exporter.
The excess of national saving over investment not only permits Japan to be a capital exporter, but also contributes – along with the mild deflation that Japan continues to experience – to the low level of Japanese long-term interest rates.
Indeed, despite the large government deficit and the enormous government debt – now close to 200% of GDP – the interest rate on 10-year Japanese government bonds is just 1%, the lowest such rate in the world.

What of the future?
While the current situation could continue for a number of years, there is a risk that rising interest rates and reductions in net business saving will bring Japan’s current-account surplus to an end.
Prices in Japan have been falling at about 1% a year.
If that swung by two percentage points – as the government and the central bank want – to a positive 1% inflation rate, the interest rate would also increase by about two percentage points.
With a debt-to-GDP ratio of 200%, the higher interest rate would eventually raise the government’s interest bill by about 4% of GDP. And that would push a 7%-of-GDP fiscal deficit to 11%.
Higher deficits, moreover, would cause the ratio of debt to GDP to rise from its already high level, which implies greater debt-service costs and, therefore, even larger deficits. This vicious spiral of rising deficits and debt would be likely to push interest rates even higher, causing the spiral to accelerate. – Project Syndicate


*Martin Feldstein, professor of economics at Harvard, was chairman of US president Ronald Reagan’s council of economic advisers, and is former president of the national bureau for economic research.