Savings are at an all-time low for Japanese households – What are the causes for this trend to arise, and any solutions that can be found?

Bloomberg News Online reported on November 08, 2013 that the share of Japanese households with no financial assets rose to a record as the decades of deflation led to fallen incomes, which forces households to dig deeper into their savings. This resulted in an increase in income-level disparities. A fair question is to ask whether Abenomics and the so-called “Three-Arrows” (Fiscal, Monetary, and Structural reforms proposed by Prime Minister, Shinzo Abe) are responsible for exacerbating the low savings situation?

The headline is essentially quite startling to begin with. Most of us have known about the relative high savings rate in Japan since the end of World War II, and beginning of the 1980s, however in recent years, along with the super-low interest rate environment in Japan, returns from savings and Japanese Government Bonds (JGBs) could not compensate for the amount of basic necessities, not to mention discretionary spending. Bloomberg News reported that on November 07, 2013, Bank of Japan (BOJ) released a survey showing that the proportion of households that were categorised as the so-called ‘living on the edge’ rose to 31.0 percent, up from 26.0 percent in the previous year. This year’s figure was said to be the highest since the polls were first conducted back in 1963. The BOJ survey covered 8,000 households of two or more people aged 20 years or older from June 14 to July 23 this year.

With the rising trend of households with no or little savings, is it fair to say that Abenomics has not worked to its full potential yet? This question is also trying to address my earlier point on whether Prime Minister Abe should take the blame. I believe that there is no point in laying blame on the Prime Minister, or anyone. The Japanese people have to confront the issues directly, and not simply blaming on politicians, simply because lives have turned upside down, and there are solutions to it, period. The root causes for the depressed savings level are plenty, and what is needed to revive the rate of investment demand, and boost savings levels are many, including widespread public education on boosting the knowledge of implementing prudent financial management practices such as portfolio diversification, to basic household expense budgeting, among others. There needs to be incentives tied in order to entice Japanese households to start invest early when young and in other long-term investments, apart from locking up the cash into savings account, or putting aside into the JGBs, which offer relatively low yields, and might not be able to supplement the falling income, rising costs of living environment since Abenomics was implemented earlier this year.

The low savings rate is quite troubling given that there are signs that the Japanese government might start to implement the sales-tax hike from the current 5.0 percent to the proposed 8.0 percent by April 2014. The expected moves could exacerbate the already-low savings rates, and falling incomes situation faced by these Japanese households. According to the BOJ survey, among the households whose assets fell, 40.9 percent expressed that the declining income forced them to draw down their savings, and was a question said to be overwhelmingly agreed by many respondents based on the survey results. Japanese employees’ wages extended the longest slide since 2010 during September, with regular wages excluding overtime, and bonuses falling 0.3 percent from a year earlier, a 16th straight drop.

At this juncture, it is worth taking a summarised view of the economic and financial developments. Most investors will generally agree that Abenomics is still trying to find its way around the Japanese economy. So far results have been quite optimistic in view of the recent revival of the Japanese equity markets; inflation starting to rise; business/consumer sentiments start to pick up; the hosting of the upcoming Tokyo Olympics in 2020; the rising profit levels among several businesses, including the recent profit announcements coming from auto mobile manufacturers such as Toyota Motors, and others. The issues that are still being worked out are plenty including the pressing issue of the clean-up process of the ‘crippled’ Fukushima Nuclear Facility; corporate reforms such forcing corporations to be more transparent in their disclosures, as shown in the case of senior executives at Mizuho Banking Group publicly acknowledging of their past ties with the Japanese ‘Yakuza’ (secret society) gang members; food-labelling issues such as the recent Takashimaya acknowledgement of its use of poor or sub-optimal quality products, and market them as high-end; and not to forget the low household savings situation in Japan.

The low household savings issue needs some urgent attention especially when the demographics have increasingly been working in disfavour for the Japanese government in view of the aging population mix, and public spending budgets have been severely trimmed. Japanese corporations should be mindful that they have a responsibility towards taking care of their employees, and not make their lives difficult which could impact productivity levels. There has to be an inclusive sharing of growth and wealth, which targets at work performance, and goals achievement. The strict hierarchical structures commonly seen in many Japanese corporations need to be reformed, and employees’ well-being needs to be placed in the forefront among other corporate objectives.

The low household savings rate issue is not going to resolved if Abenomics is not perceived as pursuing for inclusive growth. The expected consumption tax hikes are understandable in view of the need to implement urgent fiscal reforms, however Japanese politicians should also be mindful about how overcome the impact of falling incomes, and the low household savings rates that will make up the shortfall in income tax revenue due to low and/or negative taxable income in the finalised tax filings. It is neither an easy nor an impossible solution that can be resolved overnight or in a few months’ time. There has to be widespread co-ordination among the Japanese people, corporations, and the government to act on the issue, and not simply place it aside, and ignore totally.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc