Development Bank of Japan
Research Report
No. 35

Concerns for the Future and Generational
Consumption Behavior

February 2003

Economic and Industrial Research Department
Development Bank of Japan

Contents
Summary ............................................................................................................................................... iii
Introduction ........................................................................................................................................... 1
I

Recent Consumption and Saving Trends..................................................................................... 3
1. Consumption Stagnates................................................................................................................... 3
2. Welfare Impacts on Consumers....................................................................................................... 5
3. The Saving Rate Remains High ...................................................................................................... 7
4. Opinion Survey on Concerns about the Future ............................................................................. 11II

Generational Characteristics of Consumption.......................................................................... 16
1. Changes in Saving and Income Profiles........................................................................................ 16
2. Cohort Effects on Propensity to Consume .................................................................................... 21
3. Generational Differences in Public Pensions ................................................................................ 25
4. The Impact of Job Uncertainties on Expected Income.................................................................. 27

III Generational Differences and Future Consumption ................................................................ 33
1. Generational Differences in Asset Ownership .............................................................................. 33
2. Concluding Remarks ................................................................................................................... 39
Supplementary Table .......................................................................................................................... 41
References ............................................................................................................................................ 42

Development Bank of Japan Research Report/ No. 35iConcerns for the Future and Generational Consumption Behavior
Summary
1. Consumption is the largest component ofdemand, accounting for some 60% of Japan’sGDP, and it closely bears upon the welfare of thenation. While household financial assets remain
at a high level, growth in consumption has
stalled further since the late 1990s, leading someto argue that consumption is saturated. This paper explores the reasons behind recent sluggish
consumption by examining consumption and/or
saving behavior among different age groups andgenerational cohorts.
2. According to the Family Income and Expenditure Survey, consumer spending perhousehold has in nominal terms been in continuous decline since 1998. Furthermore, realconsumer spending excluding the influence of
price changes has dropped steadily since 1993
except in 1996, when the impending hike inconsumption tax sparked a last-minute rush tobuy. Growth in real consumption per capita on a
GDP basis has similarly been losing steam since
the beginning of the 1990s.
The percentage of respondents to public
opinion surveys who state that their standard ofliving has slipped has in recent years climbed instep with the slump in consumption. This trend
affects all age groups with the exception of seniors.
3. The percentage of the dependent population
has been on the rise since the first half of the
1990s as the country ages. It was believed that
this trend, in combination with the slowdown ineconomic growth, would lower saving rates. Yet
the rate remains high even today.
The relationship between an aging population and the saving rate can be seen by focusing
on age differences among heads of households.
The increase in the age of heads of households
between 1989 and 1999 pushed up the savingrate slightly by increasing the proportion ofheads of household in their 50s, the age groupwith the highest saving rate. But the rise in sav-ing rates among heads of households in their forties or younger is the primary factor driving up
the overall rate.
4. The percentage of individuals who haveconcerns about post-retirement life showed asecular increase in the 1990s. Concern has increased particularly among the young. In surveysof why people save, “selfish” motives such as for
retirement or to pay for durable goods or trips
gained greater weight during the 1990s. The
proportion of people who save for their children
is down, in part because of lower birth rates,
while the percentage of those who save to leavebehind a bequest has been consistently low.
People thus are increasingly required to savefor their own future life. As for overall assets per
capita, while the value of non-financial assets
declined over the course of the 1990s, the drop in
net assets has been small thanks to growth in financial assets. Once government finances arefactored in, however, the picture worsens.
5. In terms of saving profile by age group,
middle-aged and younger people today have asaving rate about 10% higher than their parents’generation. As for income profile, secular income growth has tapered off more and more oflate.
Using these data, we estimate the effect ofgenerational cohort on consumer behavior after
excluding such factors as observed age variations
among different generations and increased life
expectancy. The results show that: (1) lower income growth rates lower the propensity to consume compared to older generations, and (2) the
younger the generation, the lower the propensity
to consume. The latter effect is thought to reflect
the deteriorating prospects for future lifetime
income, which cannot be accounted for by realized income or employment.
6. According to government estimates, net
lifetime Welfare Pension benefits (benefits minus contributions) decline the younger the generation and this is proportional to the generational effect we obtained. Nonetheless, the genDevelopment Bank of Japan Research Report/ No. 35

iiieration gap has not dramatically changed compared to the 1994 estimates, and our estimates ofgenerational effects are stable when the sampling
period is extended. Since questionnaires revealthat confidence in the public pension system waslost in the 1990s, further investigation is necessary to link this change in confidence in the public pension system to consumer behavior.
The drop in expected income caused by thedeteriorating employment situation as calculated
for instances in which an individual becomes
unemployed or has to find a new job due to involuntary severance increased to more than 1%
in the 1990s, even once employment insurance
coverage is factored in. Involuntary severance iscommoner among the young, and income conditions upon finding a new job are worsening for
all age groups. Thus lifetime incomes will tend
to decline more among younger age groups,
which still have many working years ahead ofthem.
7. Senior citizens account for a higher percentage of the balance of total household savings
than they did two decades ago. That holds particularly true of securities, which constitute risk
assets. Nominal net savings per household (savings minus liabilities) remain unchanged compared to twenty years ago in the case of heads ofhouseholds in their forties or younger, but seniors’ savings have displayed a general tendency

to increase. While it should be noted that discrepancies within age groups increase with age,the present seniors generation still has great potential spending power, even taking into accountincreased life expectancy.
8. In conclusion, there is a definite pattern ofconsumer behavior among heads of households
depending on age group. Those who are younger
or middle-aged compensate for lowered future
income prospects by increasing their saving rate.
Meanwhile today’s seniors, who experienced
dramatic income gains during Japan’s
high-growth phase, remain uneager to spend despite having considerable savings at their disposal.
A cyclical recovery in income and employment may to some extent fuel an increase in
spending among younger and middle-aged consumers. But any serious surge in consumer
spending will require steady improvements inlifetime income prospects; hence government
action to eliminate uncertainties about thelong-term future is essential. Stimulating seniors’
willingness to spend should also help to improve
the outlook for the middle-aged and younger
generation by having a positive effect on theeconomy.

[Wataru Miyanaga (e-mail: wamiyan@dbj.go.jp)]

iv

Development Bank of Japan Research Report/ No. 35

Introduction1
Consumption closely bears upon the welfare of
the nation, and maximizing consumption may
be regarded as the ultimate goal of economic
management. Accounting for some 60% ofGDP, consumption has climbed in step withoverall economic growth, but since the late
1990s it has noticeably lost steam.
One argument takes this as evidence that
consumption is saturated. Essential living expenses have come to account for a smaller percentage of total outlays thanks to increased
purchasing power as economic growth pushes
down the Engel’s coefficient. At the same time,
income-sensitive selective consumption expenditures, which are typically directed tohigh-value durables and services, have grownproportionately.2 The consumption-is-saturated
school of thought attributes the slump in consumption to the fact that existing products haveachieved widespread ownership and become
run-of-the-mill, while alluring new goods andservices to replace them are lacking. According
to this view, satisfied consumers do not expect
existing goods and services to increase theirwellbeing; therefore the slump in consumption
is not a source of serious concern.
Stalled growth in incomes and decreased
propensity to consume are two basic factors
behind the recent slump in consumption. The
former factor, in other words stalled income
growth, does not on its own compel one to conclude that consumption is saturated, as the
Economic Survey of Japan for 1992 points out.3
Moreover, propensity to consume was actuallyon the rise at that time and showing indications
1

This report was originally published in Japanese as“Chosa” No.46 in October 2002. Translation is by theJapan Translation Center, Ltd. with cooperation of theauthor.
2
The Family Income and Expenditure Survey defines
selective consumption items based on elasticity to the total
consumption. Two recent analyses focusing on the growing proportion of selective consumption are Jindoh andYamamoto (1999) and Ogata and Ishikawa (2001).
3“Saturation should rather be used to explain why consumption fails to grow when incomes are on the rise. Of
late consumption has been in the doldrums as growth indisposable incomes languishes; hence there is no need toargue that consumption is saturated.” (Economic Planning
Agency, 1992, p. 390)that consumers wanted to maintain a certain
level of consumption, which was evidence
against the saturation. This evening out of consumption levels, with propensity to consume
moving in the opposite direction to fluctuationsin income, is known as the ratchet effect ofconsumption. But in recent years the ratchet
effect has faded as propensity to consume has
followed the same path as incomes by first tapering off and then going into decline.4 Today,with consumers voluntarily cutting spending
despite their considerable financial assets, theconsumption-is-saturated argument may at firstsight seem increasingly justified.
However, the argument needs to be considered carefully, since it contradicts the assumption of local non-satiation, the starting
point for economic analysis of consumers. This
asserts that there is always some additional expenditure, no matter how small, that can improve wellbeing, and places no restriction
whatsoever on consumption. Most claims about
saturated consumption these days cite widely
owned goods in support, but in order to contend
that consumption in general is saturated, onemust demonstrate that demand for goods andservices is satiated across the board. However,the Family Income and Expenditure Survey(FIES) shows that over the long term spending
on certain goods and services has actually increased, which suggests merely a change incontent of demand. And few would dispute that,were limitless funds available, expenditures oncars, vacations, and cottages would rise. Moreover, when consumers are saving for futurepurchase of a home or other major purchase, or
when they are awaiting the appearance of a newor groundbreaking product or service, they may
voluntarily cut back on current expenditures,
but that does not indicate a loss of appetite forspending.
The last example involves distribution of
consumption over different points in time, apattern that the life-cycle hypothesis extends
4

The ratchet effect works as a matter of course over extremely short periods, as when expenditure of income
obtained on payday is spread out over a whole month.
However, the term normally refers to the smoothing of
consumption levels in the face of fluctuations of income
over the course of a multiyear economic cycle.

Development Bank of Japan Research Report/ No. 35

1over a lifetime. According to this thesis, thepresent dip in both incomes and consumption
can be explained in light of the worsening outlook for lifetime earnings. Although the ratchet
effect works against temporary fluctuations inincome, if people conclude that the current deterioration in income situation will continue
indefinitely, they will tend to spend less as theysave more for the future. This paper attempts to
explain recent trends in consumption in light ofthis change in prospects for lifetime income.
However, it has been observed that any
analysis predicated on a representative household will suffer numerous limitations. Sometimes it is not appropriate to draw conclusions
from a fictionalized, composite model of an
average household about actual economic behavior, such as the relationship between abundant financial assets and consumption, fluctuations in saving rates, and the impact of tax
changes. Nor can solid indications be obtained
about structural changes. In analyzing
consumption behavior, therefore, this paperclassifies households by age group or generational cohort. One reason for adopting this approach is the growing generation gap in income
and employment prospects caused by secularchanges in economic climate. A further goal is

to contribute to the debate on the impact of suchtools of social redistribution as taxes and social
security on different age groups’ prospects,
which is an issue that is increasingly difficult toignore.
This paper is organized as follows. Chapter
I surveys consumption trends and considers
what conclusions can be consistent with fluctuations in saving rates and changing consumer
attitudes. Chapter II whittles down the factors
behind those consumption trends and to estimate the function of propensity to consume using data for the different cohorts from the FIES.
In contrast to previous studies of generational
differences in concerns about the future and in
consumer behavior,5 here synthetic panel data
are used, and patterns that can be explicitly accounted for by income and employment are
identified; what is left over is each generation’s
characteristic outlook for lifetime income. The
impact on this outlook of employment and public pensions, a form of social redistribution, isthen considered. Chapter III reviews generational differences in ownership of assets andoffers suggestions on how to stimulate a recovery in consumption as concluding remarks.

5

Recent analyses of consumption trends from a generational standpoint include Nakagawa (1999), Suzuki (2001),
Higo, Sugou and Kanaya (2001), and Masuda (2001).

2

Development Bank of Japan Research Report/ No. 35

sales have engendered a mood of recession on
the retail floor.
Next, taking 1980 as 100, we examine theindividual components of demand that comprise
GDP (Figure 1-2). There have been four economic cycles (trough-peak-trough) over the past
twenty years. Consumption has been spread out
evenly, fluctuating little compared to othercomponents of demand and that portion of GDP
equivalent to income. Of the different components, consumption has displayed the third
lowest increase after housing investment (which
is another household economic activity) and
fixed public capital formation. Since it has remained below GDP, it cannot be considered tohave driven economic growth; rather, it may be
regarded as a form of derivative demand dependent on income. 6 The stagnation in con-

I Recent Consumption and
Saving Trends
1. Consumption Stagnates
As the figures for consumer spending perhousehold in the Family Income and Expenditure Survey (FIES) shows (Figure 1-1), realconsumption has been in continuous decline
since 1993 except for a brief upswing during
the 1996 recovery. Every category of expenditure has registered a drop with the exception ofdurables, and spending on services has lost its
previous buoyancy in a repetition of the patternof non-durables (foodstuffs etc.) and semidurables (clothes, books, etc.). Nominal consumption has been noticeably dull since 1999 as
dis-inflation leads to deflation, and dwindling
6(%)
DurablesNon-durables
Nominal consumption

5
4

Semi-durables
Services
Real consumption

3
2
1
0
-1
-2
-3
88

89

90

91

92

93

94

95

96

97

98

99
00
01
(Calendar year)

Figure 1-1. Year-on-year Growth in Household Spending
1. Consumer spending for all households on goods and services excluding allowances, social
expenses, and money sent.
2. The impact of dwindling household size was eliminated as follows. The adjustment factor
for number of household members (strictly speaking calculated on the total amount ofexpenditures including allowances etc., with four-member households equivalent to 100)is released every five years. Since no pattern of change could be identified in the figuresfor 1990, 1995, and 2000, the average of these was used throughout.
Sources: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Family Income and Expenditure Survey and Consumer Price Index.”

Notes:

6

There is a claim that since the (provisional) trough in
October 2000 consumption has been robust regardless ofthe deteriorating employment and income situation. However, consumption fluctuates only slightly anyway; therefore it should be regarded as merely giving the appearanceof firmness in contrast to the cyclical dip in other indicators. Here we examine consumption trends from a more
long-term viewpoint.

Development Bank of Japan Research Report/ No. 35

3

(1980=100)
Gross domestic expenditures
Consumption of households
Private Residential Investment
Private Non-Residential Investment
Government consumption
Public Investment
Exports
Imports

250

200

150

100

50
80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

(Calendar year)

Figure 1-2. Growth in Real GDP by Component of Demand
Note:
Hatching indicates periods of recession.
Source: Cabinet Office, “Annual Report on National Accounts.”

sumption is thus serious even when comparedto the slump in exports and in corporate capital
investment that has provoked concerns on their
future growth in recent years.
In the System of National Accounts, consumption expenditures basically comprise economic transactions conducted on the market.
Durables are valued according to expenditure
thereon. While they account for less than 10%
of total consumption expenditures, fluctuations
are dramatic due to the impact of product lifecycles and taxation. This practice of valuing
durables according to expenditure is far from
ideal, since households make purchase decisions based on the user value of what they already own (i.e. the benefits it offers) rather thanwhat they have paid during the recent period.7
Therefore we estimated the user values of durables based on the stock series for that category
7

Purchase of a durable item involves a one-time outlay
on something that will be used for several years. Estimating user value is difficult, and it is impossible to avoid
being arbitrary; hence many analyses leave out (semi)
durable goods for convenience.

4

Development Bank of Japan Research Report/ No. 35

of goods in order to compile a consumption
series substituting the new values, and compared it to the original expenditure-based series(Figure 1-3). 8 User values are equivalent toamount of expenditure as redistributed over theperiod of use; hence fluctuations tend both to besmaller and to lag behind. According to our
calculations, the economic benefit that households derived from using durable goods increased more during the 1990s than the figures
for expenditure normally employed would suggest, with the gap between the two graduallywidening. However, even when we use thismodified consumption series, the stagnation in
consumption during the latter half of the 1990s
is evident as well.
8

We extracted the figures for closing stocks of major
consumer durables from the supplementary tables in the
Stocks section of the System of National Accounts, thenobtained the user values by working out depreciation values. Those numbers were then substituted for the figures
for expenditures on durable items. See Nakamura (1999).
The service life of durables as calculated by dividing
stocks by the depreciation values obtained was somewhat
over seven years, which represents a slight prolongation.

(1991=100)
120
115
110
105
Original series (durables by expenditure)
Adjusted series (durables by user value)

100
95
91

92

93

94

95

96

97

98

99
00
(Calendar year)

Figure 1-3. Real Household Consumption on a GDP Basis
Notes: 1. Author’s calculations based on Cabinet Office, “National Accounts.”
2. In the adjusted figures the purchase price of durable goods is replaced by theirdepreciation value.

In addition, in recent years there has been agrowing tendency to utilize durables for longer,
which is facilitated by the expanding second
hand market, by transferring ownership. Thishas had the effect of boosting consumption on
the user side without entailing additional expenditure. But can it be regarded as one of thefactors behind the slump in new consumption
expenditures? Certainly, fresh demand may decline unless consumers own more of each tobalance out what they save by extending theperiod of use. However, this trend is far from acase of shoppers eager to pay less and savemoney putting a damper on total consumption.
On the contrary, it should be seen as a way for
consumers to fulfil their wide-ranging wants
when overall consumption levels are being cut
back. There is considerable likelihood that thesavings achieved by paring back on new purchases of certain items are being channeled into
other expenditures. In light of this fact, let us
further explore the reasons behind the slump in
consumption based on the results of a survey ofconsumer attitudes.
2. Welfare Impacts on Consumers
The Opinion Survey on National Living Standards conducted by the Cabinet Office (for-merly the Prime Minister’s Office) tracks perceived improvement in living standards on a
year-on-year basis. Recently the percentage of
respondents stating that their standard of living
has declined has risen in step with the slump in
consumption (Figure 1-4). These results suggestthat a growing proportion of consumers findthemselves unable to increase expenditures despite a desire to spend.
Figure 1-5 shows the pattern for different
age groups during two periods when perceived
living standards dropped sharply. Figure 1-5(1)illustrates the recent state of affairs. The percentage of respondents in the under-60 age
group stating that their living standards had declined climbed dramatically between May 1997
and December 1999. What with spiraling unemployment and a serious recession that drove
some financial institutions into bankruptcy, theworsening economic situation of these years
seems to have had a greater impact on workers.
Figure 1-5(2) shows the pattern for the early
1970s, when the deterioration in economic climate was even more rapid. Unlike during therecent slump, all age groups were roughly
equally affected. Furthermore, in the 1970s, although the discrepancy between age groups was
small, relatively speaking it was the sixties age
group which registered the largest percentage ofDevelopment Bank of Japan Research Report/ No. 35

5(Percentage of respondents)

(%)

12

100
90

10

80

8

70
60

6

50
4

40
30

2

20

0

10

-2

0
64

66

68

70

72

74

76

78

80

Improved
68 SNA

82

84

86

88

Same
93 SNA

90

92

94

96

98

00

Declined
Adjusted 93 SNA

Figure 1-4. Real Increase in Per Capita Consumption andPerceived Improvement in Living Standards
1. The right-hand scale gives perceived change in living standards compared to one year before as a weighted
average converted to calendar year.
2. The adjusted SNA is based on consumption of durables as given in Figure 1-3.
Sources: Cabinet Office, “Annual Report on National Accounts,” “Opinion Survey on National Living Standards,” andMinistry of Public Management, Home Affairs, Posts and Telecommunications, “Population Estimates.”

Notes:(1) Recent Trends
40(2) Percentage Answering “Declined,” 1970-75(％)

45Jun. ’02
Dec. ’99
May ’9735
30

Declined(％)

40

Jan. ’74

35
30

25

May ’75

25

20

20

15

Feb. ’73

15

10
5

Jan. ’70

10

Improved

5

0

0
20s

30s

40s

50s

60s

70-

20s

30s

40s

50s

60s

70-

Figure 1-5. Perceived Improvement in Living Standards by Age Group
1. The question: “How does your present living standard compare with one year ago?”
2. Until February 1973 all respondents over sixty were lumped together; therefore the percentages for the“60s” and “70-” age groups in Figure 1-5(2) are the same.
Source: Cabinet Office, “Opinion Survey on National Living Standards.”

Notes:

6

Development Bank of Japan Research Report/ No. 35

Change in perceived improvement inliving standards (%)

10

1965-75
1976-895

1990-00
0
-5
-10
-15
-2

0

2

4

6

8

10

Change in per capita consumption (%)

Figure 1-6. Change in Consumption Levels and Perceived Improvement in Living Standards
1. Per capita consumption is based on household expenditures as given in 68 SNA.
2. Change in perceived improvement in living standards gives the year-on-year increase/decrease in percentage of respondents attesting to no decline as a weighted average converted to calendar year.
Sources: Cabinet Office, “Annual Report on National Accounts,” “Opinion Survey on National Living Standards,” andMinistry of Public Management, Home Affairs, Posts and Telecommunications, “Population Estimates.”
Notes:

respondents attesting to a decline in living
standards. This generational pattern remainedlargely unchanged through 1997. People tend to
detect a drop in living standards at that turning
point when they retire and start living on theirpension. The soaring inflation that continued
until the mid 1970s aggravated that perception.
But since 1999 the highest percentage of respondents stating that their living standards
have declined has been among those in theirfifties, who are still pursuing careers and are atthe peak of their earning power. The perceptionthat living standards are in decline is particularly marked among this middle-aged segmentof the population, even when compared to theyoung.
Let us examine the correlation between percapita growth in consumption and perceived
improvement in living standards (Figure 1-6). A
decline in the former indicator from close to
10% to 2% has no effect on the latter, but once
growth in consumption drops to below about
2%, perceived living standards begin to decline.
When growth in consumption hits zero, perceived living standards drop, indicating that

relatively solid spending on the part of “bigspenders” drives up average consumption. Although the correlation between perceived living
standards and growth in consumption depends
on this pattern, around 2% growth in consumption is one possible target to increase the number of people who perceive an improvement instandard of living.
3. The Saving Rate Remains High
Consumption can therefore be seen as a yardstick of the nation’s welfare. GDP, that key indicator in managing the economy, is ultimately
channeled into present and future consumption.
Given the crucial nature of consumption, economic growth theory refers to the principle ofmaximizing the long-term benefits to be derived from it as the golden rule (Phelps 1961).
As in many other growth models, household
finances have an impact on the growth process
via saving rates. This section looks at recent
savings trends.
First we examine the lifecycle hypothesis,
which presents a microeconomic basis for divi-

Development Bank of Japan Research Report/ No. 35

7and state of health, total consumption will equal
lifetime income, so no assets will be left overafter death. During the younger years savings
will be in the minus column since debt is used
to cover consumption in excess of income.
Middle age is devoted to paying off those earlier debts and saving money for retirement.
Savings peak at time of retirement. Those savings, along with pension income, are thentapped to fund consumption, which therefore
tapers off only gradually despite the drop inincome consequent on retirement.
Predictions hold that Japan’s high saving
rate, which is regularly cited as one of the key
factors that enabled the country to achieve suchhigh economic growth, will go into decline atsome point in the future. The primary basis forthat forecast is the aging population. Figure 1-8
shows past and projected future changes in Ja-

sion of income into consumption and savings;
in other words, distribution of resources overdifferent points in time. Figure 1-7 shows theclassic profile of consumption and income
based on the lifecycle model. Here, for simplification, it is assumed that income is generated
from the outset. The horizontal axis can then bethought of as a model of a single household,including dependents, as observed over thecourse of the household head’s working career.
This has the added advantage of ensuring compatibility with the statistics on individual
household finances to be discussed later. Income increases with the number of years
worked, peaking at middle age, and upon retirement pension income flows in. Consumption,on the other hand, is distributed as needed overthe different stages in life. The assumption isthat, barring uncertainties about time of death

IncomeIncomeConsumption

Consumption

BirthRetirement

Death

Figure 1-7. Lifecycle of Income and Consumption(tens of thousands)

(％)

14000

50
Over 65→ Estimation

12000

40

10000
8000
6000
4000
2000

Under 15

30

15-64

20

Right-hand scale

10

Dependent population
ratio (in percent)
Under 15

0
2050

2040

2030

2020

2010

2000

1990

1980

1970

1960

1950

1940

1930

1920

0

Over 65

Figure 1-8. Changes in Age Composition
Note: Dependent population ratio refers to individuals under 15 and over 65 as a percentage of the total population.
Source: National Institute of Population and Social Security Research, “Population Projections” (February 2002).

8

Development Bank of Japan Research Report/ No. 35

(%)
30
25
20
FIES (workers’ households)
Adjusted 68 SNA
Adjusted 93 SNA

15
10
63

68

73

78

83

88

93

98
(Calendar year)

Figure 1-9. Saving Rate
The SNA numbers have been adjusted by excluding imputed rent of owned houses
and medical expenses covered by social security, the two major forms of fictitious
consumption, in order to bring them more closely in line with the family survey figures.
Sources: Ministry of Public Management, Home Affairs, Posts and Telecommunications,"Family Income and Expenditure Survey” and Cabinet Office, “Annual Report on
National Accounts.”
Note:

pan’s demographic breakdown. Due to thegrowing number of old people, the percentageof the dependent population has been on theincrease since bottoming out in 1990. An increase in the dependent population, which basically just consumes, puts downward pressure
on saving rates in the economy as a whole bydriving up overall consumption relative to production. The stock of deposits will similarly go
into decline if seniors take out more savings
than workers are putting in the bank.
The lifecycle hypothesis also predicts thatlower economic growth will translate into alower saving rate. Economic growth produces
intergenerational differences in lifetime income,but those differences shrink when growth issluggish. That in turn drives down saving rates
in the economy as a whole, since unlessage-group profiles differ between generations
the income generated by workers will fall shortof consumption by seniors.99This description applies to two economies with different
growth rates. As will be seen below, it is conceivable thatthe saving rate could rise when an economy experiences a
slowdown in growth. The relationship between economic
growth and saving rates has been analyzed using
cross-country data (Carroll and Weil, 1994, Attanasio,
Picci and Scorcu, 2000 etc.), but some of the results are

These considerations led to a general consensus that Japan’s saving rate would fallsooner or later. Figure 1-9 plots saving-rate
trends. According to System of National Accounts statistics the saving rate peaked in 1976,
then went into decline until 1988. This trend
was seen as consistent with the predictions. But
in the 1990s the rate remained on the whole flatin contradiction to what was expected.10 The
saving rate as given in the FIES has also followed a definite upward trend in recent years,
although it differs considerably from that in the
SNA in both actual percentage and pattern offluctuation because it does not cover the same

inconsistent with the above explanation as far as cause andeffect are concerned. The question still awaits elucidation.
10
Cross-country statistics issued by the OECD confirm
that Japan’s saving rate has not dropped since the late
1990s. Hayashi (1986, 1997) and Iwamoto (1996) argue
that Japan’s saving rate in the broad sense of the term (i.e.,that of the economy as a whole) is not really that high: thegap with the US is to a large extent illusory, being attributable to accounting practices relating to depreciation ofassets followed by the government and private-sector
firms outside the financial sector. In examining futurefinancial burdens below, we will take a brief look at thebalance of general government accounts and social security, which exert a disproportionate effect on household
finances.
Development Bank of Japan Research Report/ No. 35

9

3

(%)

2
1
0
-1
-2

GGrowthrowth inin Consumption
Consumption
I ncome
IncomePPropensity
ropensity totoconsumer
consume

-3
-4
91

92

93

94

95

96

97

98

99

00

01

Figure 1-10. Changes in Real Consumption by Factor
This graph shows the factors behind fluctuations in realconsumption as divided into real disposable income andpropensity to consume.
Sources: Ministry of Public Management, Home Affairs, Posts
and Telecommunications, “Family Income and Expenditure Survey and Consumer Price Index.”Note:scope.11
Figure 1-10 divides the factors behind
fluctuations in real consumption into income
and propensity to consume based on the FIES.
In 2001, as income fell for the fourth consecutive year, propensity to consume failed to pickup the slack, an indication that the ratchet effectis fading. As in 1998, this can be ascribed to theperception that recent income fluctuations are
not temporary but permanent in that they reflectchanges in lifetime income. Above, in examining the effects of lower economic growth onsaving rates, we noted the impact of intergenerational gaps in lifetime income; on the other
hand, if a slowdown in growth results in forecasts being revised downward, the saving rate
per household may actually rise. No single factor determines whether the overall saving rate
will go up or down.
11

The gap between the saving rate as given in the FIES
and that in the System of National Accounts has reachedclose to 20% of late. The chief differences between thetwo surveys are as follows: (1) The GDP statistics include
imputed rent of owned houses and social security benefits
covering medical expenses. (2) The totals for working
households used in the family survey do not include single-member households and households without income.
But these discrepancies alone are not enough to accountfor the gap; the difference in sample design appears to be afurther factor. Figure 1-9 has been adjusted along the samelines as Iwamoto, Ozaki and Maekawa (1995), which provides a summary of research on the discrepancies.
10

Development Bank of Japan Research Report/ No. 35

In order to clarify the relationship between
an aging population and the saving rate, weplotted by age group saving rates for all households, including single-member and seniors’
households, following Higo, Sugou and Kanaya(2001) (Figure 1-11). The data are taken fromthe National Survey of FIES. The left-handgraph showing breakdown of households by
age clearly reveals that the population has become older, with the peak age for heads ofhouseholds shifting from the forties up until
1994 to the fifties in 1999. And, as theright-hand graph indicates, those in their fifties
have the highest saving rate. Thus the grayingof the population has had the effect of driving
up the saving rate. But this age-based demographic factor is not enough to explain even atenth of the rise over the decade, most of whichis accounted for by an across-the-board jump insaving rates among the below-fifty age group.
As Japan ages, the over-sixty generation with
its lower saving rate will come to account for alarger slice of the population; hence it is possible that at some point the overall saving rate
might drop. However, if today’s working generation, which has driven up the saving rate in
the first place, maintains that same high rate,
the decline will be a gradual one despite the(1) Distribution of Households by Age Group ofHousehold Heads
30(%)(2) Saving Rates by Age Group
40

25

(%)

35

20

30
15
1999 (51.5)
1994 (50.1)
1989 (48.3)

10

25

5

1999 (33.2%)
1994 (33.0%)
1989 (30.6%)

20
-29

30s

40s

50s

60s

70-

-29

30s

40s

50s

60s

70-

Figure 1-11. Distribution of Households and Saving Rates by Age Group
1. The figures have been annualized, as the survey itself covers the three-month period September-November.
2. The figures have been adjusted and totaled in accordance with Higo, Sugou and Kanaya (2001).
3. The numbers in brackets give the averages for all households. The ages in Figure 1-11(1) are weighted averages based on 25, 35 etc. through 75.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Report on the Survey of Consumer Finances.”
Notes:

country’s graying population.12
4. Opinion Survey on Concerns about
the Future
One possible factor behind the recent slump in
consumption and stubbornly high saving ratelies in worsening prospects for those of working
age. On the other hand, those who subscribe to
12

Figure 1-11(2) conflicts with the lifecycle hypothesis inseveral respects. The saving rate among young people,
which according to the lifecycle hypothesis should be
negative, is in fact over 20%, while the over-seventy age
group, which is supposed to be depleting its savings, still
has a high rate of around 30%. The same trends are to beobserved to a greater or lesser extent in the other developed economies, and various attempts have been made tocome up with an explanation. The question of the validityof the lifecycle hypothesis has important implications forsuch issues as the relationship between an aging population and the saving rate, the tax system, and how the costof government-bond issues should be shared out between
different generations. Most recent studies, such as Horioka
et al. (2002), argue that the lifecycle hypothesis is valid forJapan, albeit in modified form. The present paper assumes
the hypothesis’s basic validity. See also footnotes 14 and22.

the view that consumption is saturated mightseek the reason instead in greater availability ofmoney to save thanks to a rise in absolute income levels. We will examine qualitative trends
in this area based on opinion survey results before going on to the next chapter to conduct
quantitative analysis.
According to the Public Opinion Survey on
Financial Assets of Households (formerly titledthe Public Opinion Survey on Savings) implemented by the Central Council for Financial
Services Information (Figure 1-12), over thecourse of the 1990s there has been a secularincrease in the percentage of Japanese worried
about life after retirement (Figure 1-12(1)). The
growth in concern has been especially marked
among those under forty (Figure 1-12(2)). The
top reason given for this concern in the 2001
survey was lack of adequate savings (75.6%),
followed by insufficient pension and insurance(67.0%), failure to save and otherwise prepare
for retirement due to lack of the wherewithal to
do so (45.2%), and insufficient retirement
package (28.9%). Figure 1-12(3) shows how
the percentage of respondents citing the top two
Development Bank of Japan Research Report/ No. 35

11reasons has fluctuated by age group. Both garner high percentages among middle-aged andolder respondents soon facing retirement. But
while the percentage of respondents citing lackof savings has changed little over the decade,the percentage worried about pensions and insurance has risen sharply among all age groups,
including those in their twenties. The growing

sense of unease is to be seen across all income
brackets, with a slightly sharper jump among
those with the highest incomes (Figure 1-12(4)).
As in the case of young people, this indicates aworsening of sentiment among a segment of the
population that has traditionally not had toworry about the future.

(1) Percentage of Persons Concerned about
Post-Retirement(2) By Age Group

90

(%)

100

80

90

70

80

60

（%）

70

50

60

40

50

30
20

Very worried

40

10

Somewhat worried

30

2001
1997
1995
1993
1991

20

0
92

93

94

95

96

97

98

99

00

20s

01

(3) Reasons for Concern by Age Group
(%)

100

75

80

90

70

70

80

Lack of savings

65

Insufficient pension and insurance(right-hand scale)

60
55

2001
1995
1991

50
45

60
50

30s

40s

50s

60s

50s

60s

70-

（%）

70
60
50

40
30
20

20s

40s

(4) By Income Bracket
90

80

30s

70-

2001
1997
1995
1993
1991

40
30
20
-2

2-3

3-4

4-5

5-7

7-10
10(millions of yen)

Figure 1-12. Percentage of Persons Concerned about Post-Retirement
1. The question: “What do you think life after retirement (“your life in future” in the case of seniors) will belike in economic terms?” The over-sixty age group has been included in the survey only since 1997. The
data in Figure 1-12(1) are restricted to responses by heads of households under sixty.
2. Figure 1-12(3) gives the percentage of respondents expressing concerns who chose each reason (multiple
answers were allowed). Percentage of respondents citing lack of savings in 1995 is not included since thefluctuation was slight.
3. Only two thirds of responses included income; therefore the results do not add up to a total even if their(weighted) average is used.
Source: Central Council for Financial Services Information, “Public Opinion Survey on Financial Assets of Households”(formerly titled the “Public Opinion Survey on Savings.”)
Notes:

12

Development Bank of Japan Research Report/ No. 35

Figure 1-13 gives motives for saving.
“Selfish motives” such as to fund one’s retirement years or to pay for durable goods and vacations have gained greater prominence.
Conversely, the percentage of respondents cit-

ing their child’s marriage or education as a motive is down, while the desire to leave a bequest
has ranked consistently low. Although thistrend can be ascribed in part to a rise in thepercentage of households which do not have
(%)

300

70

As a contingency against
illness or disasterFor retirement

250

68

200

66

For durable goods,
vacations etc.
T o buy or remodel a house

150

64

As a bequest to offspring

100

62

For child’s marriage

50

60

For child’s education

0

58
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01

Others“Selfish” motives ratio

Figure 1-13. Motives for Saving
1. This graph plots the totals for each answer (a maximum of three answers per respondent), with 100 representing the total number of respondents.
2. Percentage “selfish” motives gives the aggregate percentage of motives excluding for a bequest, for child’s
education or marriage, and other motives.
Source: Central Council for Financial Services Information, “Public Opinion Survey on Financial Assets of Households”(formerly titled the “Public Opinion Survey on Savings.”)
Notes:(1) Priority to the Present or Future60(2) Percentage of Each Generation Preferring
to “Live for Today”

(%)

80

(%)

Decade of
Birth

Living for today

1900s

70
50

1910s
60

40

1920s
1930s

50

1940s

40

1950s

30
30

Saving and investing forthe future

1960s
1970s

20

20
70

75

80

85

90

95

00

20s

40s

60s

Figure 1-14. Attitudes to Consumption and Saving
1. The question: “From now on, do you intend to give greater priority to saving and investing for the future or
to living for today?”
2. Figure 1-14(2) plots the percentage of individuals in each generational cohort who chose “living for today”
at each age.
Source: Cabinet Office, “Opinion Survey on National Living Standards.”

Notes:Development Bank of Japan Research Report/ No. 35

13consumption is to be attributed to the lack offirm prospects for the future.
The decline in savings target can be attributed in part to the falling cost of housing and tostable consumer prices. In addition, this target
does not give the ultimate peak level of savings.
As the responses of different age groups indicate (Figure 1-15(2)), the savings target rises as
people approach their sixties, which is when
actual savings tend to peak. Thus the savings
target is a short-term goal based on the amountpeople already have in the bank. That being thecase, the recent dip in savings target should beinterpreted as reflecting a delay in accumulating
savings rather than a loss of desire to save perse.
Finally, Figure 1-16 shows fluctuation ofassets per capita of population over the courseof the 1990s. Although financial assets continue
to increase, non-financial assets have dwindled
because of the plunge in real estate, whilehousehold debt has risen, with the consequencethat net worth (net value of financial assets andliabilities plus non-financial assets) has remained flat since 1992. Moreover, when thegovernment’s financial assets and liabilities arefactored in, net worth deteriorates considerablycompared to that of households alone, reflecting
the increase in government debt of recent years.

children due to falling birth rates, it is also, likethe growing concern about retirement, closely
related to the increasing tendency to save for
one’s own future.
At the same time an increasing percentage
of Japanese prefer to spend money at their present level of consumption than to save (Figure
1-14(1)). Figure 1-14(2) plots trends for separate generational cohorts at different ages. The
urge to save becomes strongest in the thirties,
after which all generations gradually display atendency to give more priority to present consumption. Generational comparisons reveal that,regardless of absolute age, the younger thegeneration, the more eager it is to spend.
Meanwhile people’s savings target, which isconsidered to be a more specific indicator of
behavior, has remained flat since 1990, declining to somewhat under 1.5 times present levelof savings (Figure 1-15).
The growing inclination to “live for today”
and the decline in savings target might bothseem like a drag on savings, but we saw in theprevious section that if anything the saving rateis on the rise. In reality, the “live for today”
attitude does not exclude the possibility of saving more money. The fact that the younger
generation gives such high priority to saving
money despite its increased weight on current(1) Savings Target
3000(tens of thousands of yen)

(2) Savings Target by Age Group(times)

6

2500

5

2000

4

1500

3

1000

2

4000
3500

(tens of thousands of yen)
50s

60s

70s

3000
2500

0

Savings target in yen
As percentage of current savings

1
0

63 66 69 72 75 78 81 84 87 90 93 96 99

30s

1500
1000

500

40s

2000

20s

500
0
91 92 93 94 95 96 97 98 99 00 01

Figure 1-15. Savings Target and As a Percentage of Current Savings
Note:
The question (unchanged throughout): “How much money does your family currently aim to save?”
Source: Central Council for Financial Services Information, “Public Opinion Survey on Financial Assets of Households.”

14

Development Bank of Japan Research Report/ No. 35

There is a high probability that government
debt will be financed by future tax increases,
and even if these take the form of taxes on cor-porate profits, they could ultimately have an
impact on family finances via wages, jobs, or
stock prices.13(tens of thousands of yen)
2500

1000

Government financial
assetsHousehold non-financial
assetsHousehold financial
assetsGovernment debt

500

Household debt

2000
1500

Net worth0

Net worth (including
government portion)

-500
-1000
90

91

92

93

94

95

96

97

98

99

00

(end of calendar year)

Figure 1-16. Assets Per Capita of Population
Source:Cabinet Office, “System of National Accounts.”

13

This description does not take into account the government’s non-financial assets, which are of low liquidity.
Government non-financial assets may increase householdincome by offering productivity benefits through social
capital and by buoying up the economy, but Kondo andIhori (1999) demonstrate that this effect has faded in recent years.

Development Bank of Japan Research Report/ No. 35

15

II Generational Characteristics
of Consumption
1. Changes in Saving and Income Profiles
The previous chapter showed that the primary reason for Japan’s stubbornly high savingrate despite its aging population is the increased
tendency to save of the working generation,
which, according to opinion surveys, is increasingly concerned for the future. This chapter attempts a quantitative analysis of the specific factors influencing the consumption andsavings behavior of different generations.
The statistical sources of generational dataon household finances currently available are
the National Survey of Family Income and Expenditure and the Family Income and Expenditure Survey (FIES). The former covers a sample
measuring seven times that of the FIES: 59,800
households in the 1999 survey, including approximately 5,000 single-member households.
It also displays a high degree of statistical accuracy, but it has its drawbacks: it is carried out
only once every five years, making it impossible to gauge more recent trends; it covers only athree-month period between July and September (two months in the case of single-member
households); and, while improvements havebeen made in the survey contents, that necessitates adjustments when making chronologicalcomparisons. The FIES for its part only covers
households with two or more members, and theinformation it provides on income is restricted
to working families. Nonetheless, here we will
utilize the latter, for it eliminates the need toestimate or adjust when compiling data andmakes it easy to compare data from different
points in time. The FIES has one more shortcoming: the monthly sample size is merely
8,000 households or so. In this study, however,
the accuracy improves considerably since
yearly averages are used.14
The following analysis primarily uses gen14

The standard error for expenditures of workers’
households in each month’s FIES is 1.6%. All other things
being equal, the average annual standard error would thenwork out to approximately 0.5%, since the sample size is
twelve times as large.
16

Development Bank of Japan Research Report/ No. 35

erational cohorts as classified by year of birth.
For example, for the cohort born between
1936-40, we employ data for 2000 (ages 60-64),
1995 (ages 55-59), and 1990 (ages 50-54). Figure 2-1(1) gives breakdown of heads of household by age. Below the peak age group of 50-54,
the pattern diverges from overall population
distribution, which is somewhat flatter. This isbecause part of this segment of the population
is included in households headed by parents(see Figure 2-1(2)), although in some cases it is
the son or daughter who is the head of thehousehold (“Live with parents” in Figure2-1(1)) 15 Nonetheless, nuclear families andsingle-member households make up the majority at all ages, and there are no serious obstacles
to observing consumption behavior of the average household as long as differences in thatbehavior by breakdown and type of household
remain steady over time.
Figure 2-2 shows saving rate profiles fordifferent ages. As can be seen from Figure2-2(1), the saving rate has risen in virtually all
age groups in a pattern consistent with the
climb in saving rate in the overall economy (theline labeled FIES in Figure 1-9). 16 Figure
2-2(2) gives the rate by cohort. Generations
born more recently have a saving rate some
10% higher than that of their parents’ generation. Thus chronological trends can be interpreted as generational differences. Note also
that, since saving rate equals 1 - propensity toconsume, the regression analysis given in thenext section, which treats propensity to consume as a dependent variable, is equivalent toan analysis of the saving rate fluctuations here
observed.

15“Seniors’ households” is not synonymous with seniors
at the individual level, which is one of the reasons thathousehold data contradict the lifecycle hypothesis. In particular, it has been noted that the saving rate gives theappearance of remaining positive, in violation of the hypothesis, because the data on working households in the
FIES do not include jobless households already digging
into their savings (Yashiro and Maeda, 1994). However,this fact is not of immediate concern in observing intergenerational differences.
16
Saving rate is here defined as (disposable income –consumption expenditures) / disposable income. The FIES
terms this the ration of surplus.

(1) Composition of Household by Age Group of Head(tens of thousands of households)
700(2) Family Breakdown of Seniors(tens of thousands)
1400

Other
With parents
Single-member
Nuclear family
Population (right-hand scale)

1200

900
800

1400

→(right-hand scale)

700

800

400

600

300

400

200

200

100

0

0
85-

500

80-84

1000

75-79

600

70-74

1200

65-69

85-

80-84

75-79

70-74

0
65-69

0
60-64

200

55-59

100

50-54

400

45-49

200

40-44

600

35-39

300

30-34

800

25-29

400

20-24

1000

15-19

1800
1600

500

-15

1000
Other
With son/daughter’s family
Head of household

65-

600

2000

Figure 2-1. Composition of HouseholdNote:
The numbers in Figure 2-1(2) are in tens of thousands.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, "2000 Population Census.”

Here repayment of debt is, by definition,
included in savings. However, when one moves
from a rented domicile into a self-owned homeacquired with a residential loan, the rent, classified as consumption, is replaced by loan repayments, which are treated as savings; hence
the saving rate may increase in FIES eventhough actual housing service enjoyed does notchange. Therefore, if the percentage of households with residential loans climbs among theyounger generation, an apparent discrepancy insaving rate will emerge between generations.
While it is difficult to eliminate completely the
impact of this factor,17 for the sake of simple
comparison the bottom half of Figure 2-2 plots
the saving rate with the cost of housing subtracted from consumption expenditures: in otherwords, no expenditures on housing are included
17

For example, even if someone takes out a loan to buy aresidence that she was previously renting, there is no
guarantee that the loan repayments are going to be thesame as the rent. Moreover, when people move into a
different type of residence, accompanying lifestylechanges going beyond the one-time purchase of durable
items may alter the total amount spent on consumption(i.e., redistribute lifetime consumption). That too makes
precise adjustment difficult.

in consumption. Here the saving rate at younger
ages, when rent and residential loans impose aconsiderable burden, goes up. The saving rateof younger generations remains high in Figure
2-2(4), while Figure 2-2(3) brings out evenmore sharply the climb in saving rate since the1990s. Thus the reasons behind the change insaving rate must be sought elsewhere than in
the fluctuating residential loan burden.18

18
Iizuka (2001) argues against the view that the burden ofresidential loans directly suppress consumption, claimingthat no negative impact from residential loans can be detected once apparent saving rate factors are eliminated.
Similarly, Ishikawa (2002) contends that families that own
their place of residence do not really face a heavier financial burden than other families, because they also havelarger incomes; buying a home is purely a matter of personal choice, and it is wrong to focus exclusively on theamount to be repaid. Rather, as Ishikawa and Development Bank of Japan (2001) point out, unanticipated increases in financial burdens (a climb in real interest rates
spurred on by deflation, falling housing prices and soforth) may be responsible for curbing consumption bycausing adjustments in distribution of consumption overtime and sharpening the sense of uncertainty. This point isof particular interest in the context of the this study.

Development Bank of Japan Research Report/ No. 35

17(1) By Age at Time of Survey(%)(%)
Age at timeof survey

35
30

-24
25-29

25

30-34

20

35-39
40-44

15

45-49

10

50-54
55-59

5

60-64

Age as of
2000

35
30

30-34

25

35-39
40-44

20

45-49
15

50-54

10

55-59
60-64

5

65-

Age at timeof survey

40
35

-24
25-29

30

30-34

25

35-39
40-44

20

45-49

15

50-54
55-59

10

60-64

45

60-64

55-59

50-54

45-49

40-44

35-39

(4) By Cohort(Excluding Housing Expenditure)

30-34

-24

(3) By Age at Time of Survey(Excluding Housing Expenditure)

25-29

55 60 65 70 75 80 85 90 95 00

(%)

65-

0

0

(%)

Age as of
2000

40
35

30-34

30

35-39

25

40-44
45-49

20

50-54
15

55-59
60-64

10

6565-

60-64

55-59

50-54

45-49

40-44

35-39

55 60 65 70 75 80 85 90 95 00

30-34

5

5

25-29

45

40

-24

40

(2) By Cohort

Figure 2-2. Saving Rate Profiles for Different Ages
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Family Income and Expenditure Survey (Working Households).”

18

Development Bank of Japan Research Report/ No. 35

Next we turn to income trends, the primary determinant of consumption (Figure 2-3). Figure
2-3(1) shows the so-called seniority profile,which is defined as salary by age at each point

in time. The profile on the whole remains
steady, although it rises slightly after forty.19
Figure 2-3(2) gives the same profile but measured in the real terms. The whole seniority pro-(1) Relative Income
220(2) Real Income(Income at age 20-24 = 100)

700

200

600

180

500

160

400

140

300

120

200

(tens of thousands of yen at 2000 prices)

100

100
20-24

30-34

Time of survey
70
90

40-44

50-54

60-64

75
95

80
00

85

20-24

30-34

40-44

50-54

60-64

Time of survey
70
90

75
95

80
00

85

(3) Change in Real Income by Cohort
500(Income at age 25-29 = 100)

450
400
350
300
250
200
150
100
50
60

65

Age in 2000
30-34
50-54

70

75

80

35-39
55-59

85

90

40-44
60-64

95

00
45-49
65-69

Figure 2-3. Income Profile
1. Figures 2-3(1) and (2) are based on the Basic Survey on Wage Structure. Estimated annual income wascalculated by adding regular salary and bonuses, then converted to an index.
2. Since Figure 2-3(3) extends further back in time, it adopts the figures for annual income of heads ofhousehold as given in the FIES.
3. Real income has been calculated based on the overall Consumer Price Index for 2000 excluding imputed
rent.
Sources: Ministry of Health, Labour and Welfare, “Basic Survey on Wage Structure” and Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Family Income and Expenditure Survey and Consumer
Price Index.”

Notes:

19
Note also that seniority-based differences in salary haveincreased somewhat, but this reflects trends among female
workers. Age-based differences between male workers areshrinking among both university and high school graduates.

Development Bank of Japan Research Report/ No. 35

19file has shifted upward as the economy has
grown, although virtually no such gains are observed for the 1990s. Finally, Figure 2-3(3)compares real income growth by cohort as calculated based on income at age 25-29. The risein salary is less steep the younger thegeneration, reflecting the degree of economic
growth experienced by each. As a result, oncethe outlook for lifetime income is revised
downward due to unforeseen declines inincome growth, the whole consumption profile
shifts downward and a rise in saving rate isobserved. As we saw in Figure 2-2, this effectwould be greater among younger generations,where the scope of the revision is greater.
A further simplified lifecycle model wasdevised in order to clarify the impact of suchgrowth in income on the saving rate (Figure2-4). After working for L years, a head ofhousehold spends R years in retirement; disposable income Y D and consumption C are
constant throughout her lifetime. Under these
conditions, lifetime income will equal lifetime
consumption when:

IncomeConsumption

YD

C
L years

R years

Figure 2-4. Simplified Lifecycle ModelY D ⋅ L = C ⋅ ( L + R)

(2-1)

This can be transformed into:20
C =

L
⋅ YD
L+R

(2-2)

According to this, lifetime average propensity to consume L/(L+R) is determined by
the factor of age alone, and a relative increasein length of retirement due to such causes as
longer life expectancy results in a decrease in20

Modigliani (1986) presents this as a “stripped down”
version.
20

Development Bank of Japan Research Report/ No. 35

propensity to consume. In Section I-3, we sawthat the aging of the overall economy (which isdemonstrated in a rise in the percentage of oldpeople) pushes down the aggregate saving rate.
But at the individual level, growing older drives
up the saving rate.
Next, elaborating on Formula 2-2, we devise an empirical model that takes into consideration the impact of major sources of future
prospects other than income outlook, e.g., interest rates, pension benefits, retirement package, taxes and so forth. As actually observed,
consumption C and disposable income YD are
not steady over one’s lifetime but fluctuate inaccordance with age profile as depicted in Figure 1-7. Therefore propensity to consume
C / YD is equivalent to lifetime average propensity to consume C / Y D if the factor age isaccounted for in the function f (⋅) , that is, CC, age ≡ f 
YD

 YD

(2-3)

Since, according to Formula 2-2, C is determined uniquely by Y D , we have CC
= f 
, age  ≡ f ' (Y D , age)
YD
 YD


(2-4)

Thus long-term changes in propensity toconsumer depend solely on the factor of age
and on lifetime earnings Y D . In this formula,
lifetime average disposable income Y D is theaggregate result of current level of and fluctuations in disposable income YD plus such
sources of future uncertainty as the employment
situation and pensions, henceC= f ' (Y D (⋅), age) ≡ g (age,⋅)YD(2-4')

Thus propensity to consume is determinedby the age factor in combination with a variety
of other factors that affect outlook for disposable income.

for 1970 consists of fifteen sets of data, one foreach generation from that aged 24 and under,
born between 1946-50, to that aged 65 and over,born between 1901-05; these data sets areshown in the topmost tier of hatched cells.
Unlike panel data analysis, which attempts to
identify the principles motivating the behaviorof the individual or household as the unit ofdecision making, analysis using synthetic panel
data examines the collective attributes of thespecific groups comprising the population under study; in this case, different cohorts as classified by year of birth. This approach is a rela-

2. Cohort Effects on Propensity to Consume
Next we use Formula 2-4' to identify the factors
determining future income outlook. The data
used consist of averages for each age group as
obtained every five years between 1965-2000(time of survey t) in the FIES of workers’
households; these data are organized into synthetic-panel data classified by cohort.21 Table
2-1 provides an overview of the data: the cohorts covered by the survey are listed at the side,
while their ages at the time of each survey isgiven at the top. For example, the survey results

Table 2-1. Overview of Synthetic panel Data
Year Born

Age in2000

Age at Time of Survey
Dummy

1896-00

100-04 Excluded

1901-05

95-99

D1

1906-10

90-94

D2

1911-15

85-89

D3

1916-20

80-84

D4

1921-25

75-79

D5

1926-30

70-74

D6

1931-35

65-69

D7

1936-40

60-64

D8

1941-45

55-59

D9

1946-50

50-54

D10

1951-55

45-49

1956-60

40-44

1961-65
1966-70

-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-

A1

A2

A3

A4

A5

A6

A7

A8

A9

None
NA

NA
NA
NA

93

NA

172

107

326

190

105

NA

462

316

164

94

689

520

347

205

133

NA

955

741

658

455

274

158

NA

1039

934

764

635

567

322

193

NA

899

980

859

730

616

586

341

NA

497

947

1014

871

770

700

575

67

557

957

1000

917

831

708

D11

89

458

752

828

819

688

D12

65

339

626

718

662

35-39

D13

47

277

562

663

30-34

D14

40

265

512

1971-75

25-29

D15

49

269

1976-80

20-24 Excluded

43

Notes: 1. The figures in each cell give total number of households as recorded in the FIES. This information is not available
for 1965.
2. Among households headed by someone under 24, the number with two or more members that are headed bysomeone under nineteen is negligible (10.5% in the FIES of working households for 1962, 5.1% in the 2000
Population Census); therefore they have been counted with the 20-24 age group. Similarly, households with heads
over 65 include some headed by individuals 70 or over (23% in the FIES for 2000) but these have been countedwith the 65-69 age group.
3. Hatching indicates data used in the estimates.
21

Analyses ofhouseholdconsumption
using
synthetic-panel data have been conducted by Deaton andPaxton (1994) for U.K., the United States, and Taiwan and
by Hayashi (1988) using the National Survey of Family
Income and Expenditure. For details on this type of analysis see e.g. Matsuda, Han and Yoshizoe (2000).
Development Bank of Japan Research Report/ No. 35

21

tively straightforward and effective method of
explaining macroeconomic trends from thegroups concerned.22
The maximum sample size is 69, since thedata for 1965 are used only to calculate the rateof increase between that year and 1970, while
the generation born between 1976-80 has been
excluded. The cells in the table give the aggregate number of households surveyed; they show
considerable variety, ranging from 40 to 1039
(which is a reflection mainly of actual household distribution). Because of the discrepancy
in distribution of data, the estimates employ theleast squares method as weighted by the number of households shown in each cell.
The estimation is based on the model given
by Formula 2-4'. We try to examine the impact
on propensity to consume ( PCi ,t ) given by: (1)level of and fluctuations in income, (2) year ofbirth and age, and (3) increased life expectancy
and other trend-related factors ( Yt , the last twodigits of the survey year), and (4) the employment
situation.
A
dummy
variable( Di , i = 1,...,15 ) is used to identify factors thatcannot be explicated from the above and are
therefore generation-specific.
For the impact of income (1), the explanatory variables comprise level of real disposable
income ( YDi,t ) and real growth rate in YD overthe past five years ( GYDi ,t , annualized).
GYDi ,t incorporates two sets of information:
the seniority profile and the shift in income
level accompanying economic growth. A further explanatory variable has been added: howmuch the percentage increase in income that thegeneration has recently experienced exceedsthat enjoyed five years earlier by the cohort five
years older ( ∆GYDi ,t = GYDi ,t − GYDi −1,t −1 ).
Since we saw that the seniority profile remains
stable from survey to survey in Figure 2-3,
∆GYDi ,t primarily shows the speed of the shift
in its overall level and thus represents the outlook for lifetime income, as long as future
growth in income is based on adaptive expecta22
In some cases consumer data on individuals culled fromhousehold surveys are classified by attribute, but here we
can eliminate problems involved with estimating data at
the individual level by applying the lifecycle hypothesis
directly to households. Note that the individuals panel
created by attributes from such estimates also comprise aform of synthetic-panel data.

22

Development Bank of Japan Research Report/ No. 35

tions.
One reason for including age-related factors (2) is to control the effect of age differences in wages and income profile as given in
Formula 2-3. This variable is essential for another reason: the data used are unbalanced inthat the range of ages observed differs for eachgeneration. For example, data on younger generations are restricted to the younger years, andthe influence of the age at which a generation
was observed at any particular point needs to beeliminated so as to isolate only generation-specific characteristics. However, it is difficult to define the function f ( ⋅ ) with its explanatory variable age. Since we have a fixedsample size, we decided to use an age groupdummy ( A j , i = 1,...,9 ) within the bounds ofsignificance.23
Finally, both the active opening rate (ratioof job offers to job seekers: JORi ,t ) and unemployment rate were considered as indicators of(4) the employment situation, and the former
was selected as being the more persuasive. The
element left over in the generational dummies
D i , which cannot be explained by (1)-(4) above,is deemed to be the generational effect.24 Hereis the actual regression model incorporating theabove:
PCi ,t = β 1Yt + β 2YDi ,t , + β 3 GYDi ,t+ β 4 ∆GYDi ,t + β 5 JORi ,t +

15

∑
i =1

Di +

9

∑A +ε
j

i ,t

j =1

(2-5)
The results are given in Table 2-2. As in
23

In Figure 1-7, propensity to consume rises with age
from a negative value to a peak, then declines back to anegative level. Thus it does not have a linear correlation
with age. It is not wise to predicate too much on the seniority profile, a factor that takes account of changes in
outlook for lifetime earnings, not does it prove any morepersuasive when the income profile is simulated using thequadratic function of age. One possible reason for this isthat there is a strong correlation between consumption andincome except during the young years, and propensity toconsume varies only slightly (see footnote 11 and Figure
2-2).
24There are two reasons for employing a fixed effectmodel. First, taken together, the data cover household
finances as a whole, rather than the focus being on specificgenerations or individuals sampled from the data as inpanel data analysis. Second, clearly defined generational
differences were anticipated from the start.

trend-related factors are included. Hence, thegenerational comparison below includes a scenario where these factors are taken into account.
Both level of real disposable income YDi ,tand rate of increase therein GYDi ,t are negative. This indicates that economic growth lowers propensity to consume; in other words, it
drives up the saving rate. That could be regarded as a matter of income and propensity toconsume going in opposite directions due to thethe previous section, for comparison’s sake asecond set of figures has been calculated excluding the cost of housing in order to eliminate
the impact of increases in residential loan repayments. The time of survey coefficient Yt
is negative, which can be attributed to the direct
impact of longer life expectancy on the ratio of
job career to retirement, as well as to the effectsof the overall increase in uncertainty. However,since variables Yt for younger generations arelarge, it is likely that generation-specific

Table 2-2. Regression Results(2)(1) Consumption Expenditures

Adj.-Rsq.
Standard Error
Variable

CoefficientY-0.220 *YD-3.06E-05 **GYD-0.493 *
∆GYD
0.199
JOR
1.074
D15
106.05 **D14
107.66 **D13108.19 **D12110.55 **D11
112.71 **D10
113.97 **D9112.16 **D8
111.84 **D7
111.33 **D6
110.18 **D5
109.63 **D4
108.28 **D3
108.12 **D2107.70 **D1
104.24 **A2-4.740 **A3-5.829 **A4-4.954 **A5-2.310 *A7-1.900Consumption Expenditures Excluding
Housing Costs

0.717
2.813
Standard
Error

0.106
6.91E-06
0.215
0.175
0.728
10.00
9.88
9.58
9.21
8.80
8.50
8.24
7.98
7.78
7.50
7.34
7.34
7.13
7.04
8.14
1.626
1.395
1.125
0.952
1.007

Adj.-Rsq.
Standard Error

0.639
3.148
Standard
Error

Variable

CoefficientY-0.502 **

0.090

GYD
∆GYD
JOR
D15
D14
D13
D12
D11
D10
D9
D8
D7
D6
D5
D4
D3
D2
D1
A2
A3
A4

-1.428 **0.500 *
1.890 *
114.21 **115.81 **116.47 **118.74 **120.51 **121.33 **119.01 **118.21 **117.28 **115.54 **115.19 **113.23 **112.17 **110.07 **107.07 **-4.277 **-4.607 **-2.963 **

0.222
0.196
0.796
9.93
10.06
9.83
9.53
9.09
8.78
8.53
8.26
8.06
7.80
7.63
7.59
7.31
7.21
8.43
1.564
1.292
1.033

Note: Significance level is 1% for items marked ** and 5% for items marked *.

Development Bank of Japan Research Report/ No. 35

23

The regression results excluding housing
costs are listed on the right-hand side of Table
2-2. The results, including the signs of coefficients, were similar to those obtained when
housing costs were included, although there
were slight discrepancies in the age-group
dummies and YD was excluded as not being
significant. As with the observation given in
Figure 2-2, fluctuations in residential loan repayments were not enough on their own to account for generational differences in propensity
to consume.
Let us turn now to the generational dummycoefficients, which cannot be accounted for by
the explicit variables above. Regardless ofwhether housing costs are included, the dummies gradually increase up to and including thegeneration born in 1946-50 (the so-called baby
boomers with the dummy D10) then go into decline.25 Figure 2-5 shows, as of 2000, the deviation from D10 for the generations since thebaby boomers, which together make up today’s
workforce. We mentioned above the possibility

ratchet effect. But the explanation of Hayashi(1994), who postulates an unintended increasein savings upon growth in income, might becloser to the mark, especially with respect to theimpact of income levels. In the previous section
we argued that stagnant incomes lead to a jumpin saving rate; here we point out that when incomes rise further than expected as happened
during Japan’s rapid-growth phase, the overall
consumption level cannot keep up, resulting ina higher saving rate.
The difference with the preceding generation in rate of income growth ( ∆GYDi ,t ) has apositive coefficient. Thus, when there is a shift
in overall income level compared to the previous generation, an improved outlook for lifetime income seems to boost propensity to consume. This implies that, as we saw in Section
I-3, the slowdown in economic growth has reduced propensity to consume. Finally, the signof the active opening rate, JOR, was negative as
expected, although the significant level was not
low enough.
(1) Including Housing Costs
0(2) Excluding Housing Costs

(%)

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

-10

-12

Dummy

-14

Dummy + trend

-16

(%)

-12

Dummy

-14

Dummy + trend

-16
25-29

30-34

35-39

40-44

45-49

50-54

25-29

30-34

35-39

40-44

(age in 2000)

45-49

50-54

(age in 2000)

Figure 2-5. Generational Effect on Propensity to Consume
Notes: 1. These graphs show how much the generational effect for each age group deviates as of 2000 from that for thecohort aged 50-54 ( D 10 ).
2. Figure 2-5(1) uses the figures for consumption expenditure given in the FIES. Figure 2-5(2) uses estimates ofconsumption expenditures excluding housing costs.
3. The dummy represents the effects picked up by generational dummies; trends represent linear effect at the timeof each survey.
25
As Table 2-1 shows, data from under age 24 are available only for D10 and subsequent generations, but theperiod over which the data were gathered seems anunlikely source of the problem, since the same generational effect peaking at D10 is obtained even when the
beginning and end of the estimation period are alteredslightly.
24

Development Bank of Japan Research Report/ No. 35

that Y t might include a generational element,
and this has been factored into “Dummy +trend.” In the case of the baby boomers, who
experienced the Oil Shock and the transition to
low growth immediately after entering theworkforce, and of those born after them, suchgeneration-specific factors as outlook for lifetime income appear to have diminished propensity to consume. These generation-specific factors cannot necessarily be reduced to
non-economic causes, such as cultural trends;
one suspects the influence of factors that cannot
be explicitly accounted for due to limitations in
the regression model and variables used. Numerous possibilities come to mind, including
likely tax hikes to pay off government debt,
reductions in retirement packages, a rise in realinterest rates and drop in real estate prices due
to deflation, and the ballooning cost of medical
and nursing care due to prolonged life expectancy. In the next two sections we consider how
these generational factors might be explained,(1) Deviation from Average for All Households(in tens of thousands of yen)
3000
2500
2000
1500
1000
500
0
-500
-1000
-1500
-2000
-2500
10
20
30
40

focusing specifically on public pensions and theemployment climate.
3. Generational Differences in Public
Pensions
The question of public pensions rapidly came tothe fore as the economic climate deteriorated
over the course of the 1990s.26 Pensions directly affect generational differences throughtheir function of social redistribution via contributions and benefits. Figure 2-6(1) shows
generational differences in net lifetime benefits(total benefits minus total contributions) in
Welfare Pension based on Government recalculations conducted in 1999. Benefits decrease
the younger the generation. Given the fact thatpensions are designed to guarantee one’s livelihood after retirement in the midst of a growing economy, that trend is quite natural. But
birthrates and investment yields have continued
to worsen despite what the estimates assume,(2) Change in Net Benefits Following Recalculation8000(in tens of thousands of yen)
Difference, 1994 to 1999
1994 estimate
1999 estimate

7000
6000
5000
4000
3000
2000
1000
0
-1000
-2000
50

60

70

(age of husband in 1999)

10

20

30

40

50
60
70
(age of husband in 1999)

Figure 2-6. Generational Differences in Net Lifetime Welfare Pension Benefits
1. Net benefits equal benefits minus contributions as worked out based on the recalculated Welfare Pension
estimates for each generation. The amounts give totals for husband plus wife.
2. (1) shows deviation from the simple average of net benefits for generations aged ten through seventy in1999.
3. (2) compares net benefits for individuals (husbands) born in the same year, with the 1994 estimates converted to 1999 prices in accordance with the Consumer Price Index.
Sources: Actuarial Affairs Division, Ministry of Health and Welfare (1995, 2000).

Notes:

26
Nakagawa (1999) observes that the number of articles
on pensions appearing in weekly and monthly magazines
increased rapidly during the late 1990s.

Development Bank of Japan Research Report/ No. 35

25and there are fears that the present working
generation or even generations as yet unborn
could face an excessive burden.27
Figure 2-7 compares attitudes to public
pensions in 1985 and 2001. As we saw in Figure 1-12(3), confidence has plunged, especiallyamong young people. In addition, an estimate
was made of level of confidence in 1985 for thefour age groups over forty in 2001; this isshown as “1985 (estimate)” on the graph. As
comparison with the actual results for 2001
70

shows, confidence has declined dramatically inthe younger stratum of this segment of the
population.28 Although Figure 2-6(2) offers noevidence that generational differences have increased in the government recalculations for1999 as compared to 1994, the younger generation of consumers in particular seems to havebecome both more aware of and more pessimistic about pensions and may already be resigned
to a deterioration in pension finances.
Such a decline in confidence in the pension

(%)

60
50

1985
2001
1985 (estimate)

40
30
20
10
0
20s

30s

40s

50s

60s

70 and overFigure 2-7. Confidence in the Public Pension System
1. Percentage of respondents who answered either “Fully” or “To acertain extent” to the question “How much do you think you candepend on the public pension system for your livelihood after retirement?”
2. “1985 (estimate)” shows the level of confidence of the four age
groups over forty in the 2001 survey as extrapolated back to 1985.
For example, the figure for the 40s age group is an average of thosein their 20s and 30s in the 1985 survey as weighted 6:4.
Source: Cabinet Office, “National Survey on Lifestyle Preferences.”
Notes:

27

Another recalculation is scheduled to take place by2004 based on a downward revision in birthrates, withsuch assumptions as economic growth and investment
yields also to be revised. According to non-government
estimates, younger generations will end up paying out
more than they receive. Hatta and Oguchi (1999) draw thedividing line at the generation born in 1962, Aso (2000)
that born in 1960, and the Forum for Policy Innovation(2001) that born in 1957. These results are all roughly inagreement. Managing Japan’s pensions is thus becoming amore formidable task than ever, although Takayama(2000) emphasizes that the degree of difficulty will vary
greatly depending on the level of benefits and age at which
they start. It should also be kept in mind that income redistribution through pensions involves many different
strata: single versus married, one versus two incomes,
different levels of earnings and so forth.
26

Development Bank of Japan Research Report/ No. 35

28

In Figure 2-7 confidence falls the younger the agegroup; this is in contrast Figure 1-12(3), in which concerns
about pensions and insurance are greatest among old people. The apparent contradiction can be explained by thefact that the question in Figure 2-7 focuses specifically on
public pensions, while in Figure 1-12(3) respondents wereable to cite more than one source of concern; therefore
young people’s answers were dispersed among size ofretirement package, buying a home, rent and other such
issues of concern to their generation.

(1) Including Housing Costs
5(2) Excluding Housing Costs

(%)

5

0

0

-5

-5
-1985
-1990
-1995
-2000

-10

(%)

-1985
-1990
-1995
-2000

-10

-15

-15
25-29

30-34

35-39

40-44

45-49

25-29

50-54

30-34

35-39

40-44

(age in 2000)

45-49

50-54

(age in 2000)

Figure 2-8. Generational Effect As Estimated over Different Periods
Notes: 1. These graphs show how much the generational effect for each age group deviates as of 2000 from that for thecohort aged 50-54 ( D 10 ).
2. The estimates based on the data through 1995 and 2000 combine generational dummy plus trend; those based on
the data through 1985 and 1990 indicate only the dummy portion, since the trend is not significant.

system, which functions as a form of compulsory savings, is one of the factors that fuels an
increase in private savings and pensions. As wesaw in the preceding section (Figure 2-5), thegenerational effect pushes down propensity toconsume in and after the baby-boom generation,
which is a result consistent with the ever greater
disadvantage at which younger age groups findthemselves in the redistribution of public pensions. Nonetheless, when the generational effectis recalculated with the cutoff year of the sampling period in 1995, 1990, and 1985 (Figure2-8),29 the effect for each cohort has shown notendency to worsen in recent years. Since thestate of pension finances is closely tied to economic growth rate, it could well be the case thatthe change in attitude to pensions has already toa certain extent been factored into the income
environment, which is given as explicit explanatory variables.

cients representing impact of the employment
situation were not significant, although theysatisfied the sign conditions. Here, in order toform a more intuitive picture of the impact of
the employment situation on workers, we calculate the percentage by which expected income decreases due to a deteriorating employment situation.
Figure 2-9 provides an overview of annual
workforce turnover. The number of individuals
leaving jobs over the course of the year totaled
7.45 million, equivalent to over one tenth of theemployed population. Of these a total of 1.51
million left their jobs involuntarily, ofwhom 950,000 found new jobs and 560,000
remained unemployed. 30 Below we use theterms probability of job change and probabilityof unemployment to refer to the percentage ofactual workers as of one year before (52.67
30

4. The Impact of Job Uncertainties on
Expected Income
In the regression analysis above, the coeffi29

However, certain non-significant explanatory variables
have been excluded.

The Survey on Employment Trends, a detailed surveyof workforce turnover in places of business conducted by
the Ministry of Health, Labour and Welfare, gives thenumber of those leaving their jobs in 2001 as 7.01 million.
Here, since we are also concerned with scale of unemployment and number of individuals leaving the workforce,
we use the Labour Force Survey: Special Survey (now theLabour Force Survey: Detailed Tabulation), which presents statistics by household.
Development Bank of Japan Research Report/ No. 35

27

Severed from jobs:
Total 7.45 million

Change jobs:
3.28 million(0.95 million)

Becomeunemployed:
1.64 million(0.56 million)

Unemployed:
3.18 million
New job seekers:
0.69 million

Leave labor force:
2.53 million

Employed: 63.41 million
Of which 53.42 million are
employees

Not in labor force:
41.62 million
Join labor force
4.58 million

Figure 2-9. Annual Workforce Turnover
1. The figures for circulation of workers give totals for the one-year period ending in February 2001; size of workforce, number of unemployed, and the figure for the non-working population are as of the end of February
2001.
2. The numbers in brackets following the figures for persons who change jobs and for those unemployed indicate
the number of people who were involuntarily severed from their jobs.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Labour force survey: Special
Survey.”Notes:

million) changing or losing jobs; the sum of thetwo is termed probability of severance. This
probability can only be obtained ex post, buthere we postulate that the average worker has afairly accurate perception of his or her risk of
involuntary severance and forecasts income onthat basis. The calculations exclude cases ofseverance upon an individual’s reaching retirement age, which are predictable. They also omit
cases in which an individual who has been laid
off gives up trying to find a new job and leaves
the workforce completely (and therefore does
match the definition of “completely unemployed”), since he or she clearly has little need
to work.
Next we consider the percentage by which
income drops depending on whether the personlaid off finds a new job or remains unemployed.
Based on a survey conducted by the Japan Institute of Labour in 1998-99, it is assumed thatwage levels drop a uniform 24.5% upon achange in jobs.31 It is also assumed that, while
31
See Ito et al. (2001). This is one of the few surveys that
captures in real numbers how changing jobs affects wages.
It covers job seekers visiting public employment agencies
including those who left work of their own accord, although the number who indicated that they quit their jobs

28

Development Bank of Japan Research Report/ No. 35

seeking work, unemployed persons receive
70% of their previous salary in the form of employment insurance for the first six months afterlosing their jobs, while those who find new jobs
receive the same amount for the whole period
up until they resume working.32 This assumption is made because, although the time it takes
for job seekers to find new jobs has lengthened
since 1995 (Figure 2-10), on average it still remains within the period covered by unemployment insurance. Percentage drop in income iscalculated assuming that those finding new jobs
for voluntary reasons, such as in search of better working
conditions, accounted for a mere 10% or so. According tofigures in the annual Wage Census (Basic Survey on
Wage Structure) showing differences in wages depending
on number of years on the job, a worker with zero years
on the job makes 40% less than the overall average.
However, this wage gap should not be taken as indicativeof the amount by which a person’s salary will fall uponchanging jobs, because it could be the result of differencesin attributes between individuals who change jobs andveteran workers.
32
Basic unemployment insurance benefits equal 60-80%(depending on salary level) of regular wages excluding
bonuses over the previous six months, with a cap according to age (around ¥10,000 per day). Benefits last between
90 and 360 days depending on age, length one has beenenrolled in employment insurance, reason for leaving
one’s previous job and so forth.

(1) Number of Persons Finding New Jobs overthe Past Year As Classified by Length of Job Search(persons, in tens of thousands)
350.0
300.0
6-12 months

250.0

3-6 months

200.0

1-3 months

150.0

15 days – 1 month

100.0

14 days or less

50.0
0.0
88

89

90

91

92

93

94

95

96

97

98

99

00

(2) Average Number of Days Required

120
100
80
60
88

89

90

91

92

93

94

95

96

97

98

99

00

Figure 2-10. Number of Days Required to Start Work Again
Average number of days required was computed by working out the weighted average for the median of the periods
given in (1).
Source: Ministry of Health, Labour and Welfare, “Survey on Employment Trends.”
Note:

resume work at lower wages than before following a period of unemployment, and thatthose remaining unemployed lose their sourceof income upon expiration of their unemployment benefits.
Percentage drop in expected income is thencalculated by weight-averaging the drop in income for each of the scenarios above according
to its probability. As the bar graph (Figure2-11) shows, risk of unemployment has risen
since declining to a low point in 1990, while
drop in expected income has climbed in tandemfrom 0.36% in 1990 to a peak of 1.24% in 1999
and still remains above 1%. This suggests that,even when employment was ultimately maintained, heightened employment risk lowered
expected income and thus acted as a brake on
all consumption tied to income outlook. Fur-thermore, an increase in employment risk is nolonger a temporary phenomenon, and there islittle room for the ratchet effect to kick in tomaintain the former consumption level.
Rise in wages has declined by more than
5% since 1990, from over 4% to a post-1998
level of somewhere around minus 1%. The
amount by which employment risk drives down
expected income may appear relatively small
by comparison. One reason for this is that wehave restricted our examination of the effect of
employment risk on income to the immediately
coming year. However, it is possible that anindividual could remain unemployed into asecond year or beyond. The likelihood of that
happening is not great, but if it does the worker
will completely lose her source of income as
employment insurance will have expired. FurDevelopment Bank of Japan Research Report/ No. 35

29

3.0

(%)
Probability of job change
Probability of unemployment
Percentage drop

2.5
2.0
1.5
1.0
0.5
0.0
88

89

90

91

92

93

94

95

96

97

98

99

00

01

Figure 2-11. Probability of Severance and Percentage Drop in Expected Income
Percentage drop in expected income is calculated for two scenarios following involuntary
severance: (1) The worker remains unemployed and loses his or her income. (2) The
worker finds a new job after a period of unemployment, but at a salary level 24.5% less. It
is assumed that employment insurance benefits equivalent to 70% of pre-severance income are paid, for six months in the case of Scenario 1, and for the whole period during
which the person is seeking work in the case of Scenario 2.
Sources: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Special
Survey of the Labour Force Survey,” Ministry of Health, Labour and Welfare, “Survey on
Employment Trends,” Ito et al. (2001).
Note:

thermore, since we have assumed a fixedprobability each year of a decline from initial
income, the drop in expected income increases
with the lapse of time.33 A vicious circle may
even be set in motion: after someone is laid off
once, the risk of being laid off again increases
upon starting a new job, and wages will falleven further if the person has to seek yet another position. Therefore involuntary severance
cannot be considered on the same level as fluctuations in wages when employment is relatively secure, for it fuels uncertainty about future income because of increased risk over thelong term.34

Next we compare percentage drop in expected income among different age groups.
Figure 2-12 shows probability of a job change
or unemployment following severance. The
situation has worsened among all age groups
with the passage of time. The over-55 age
group saw its unemployment rate sore in 1999,
when a wave of job cuts swept through theeconomy, but overall younger people have ahigher severance rate. Figure 2-13 shows difference in wages upon changing jobs. Again,
the situation has worsened among all age
groups, although middle-aged and older

33
Of the 560,000 people involuntarily severed from theirjobs in Figure 2-9, 150,000 were still unemployed a year
later (Labour Force Survey: Detailed Tabulation for January-March 2002). Assuming that the remaining individuals
found new jobs, the drop in their expected income ascompared to their original income would work out to 2.1%
in the second year as opposed to 1.2% in the first year.
34
This analysis does not take into consideration the factthat consumers are risk averse. If it did, the impact onthem would be even greater. The supplementary table atthe end of this paper shows percentage drop in expected
income for the three scenarios considered above: keep
employed, change of jobs, and severance. The percentage
drop in expected income above was calculated byweight-averaging the drop in income for each scenario

according to its probability. But if, assuming that all income is channeled into consumption, one works out theweighted average of utility levels, then the percentage
drop in income at the certainty equivalent (which yields
the same level of utility as when no uncertainty exists; (a)in the table) turns out to be greater than the simple drop in
expected income. A relative risk avoidance of up toaround 5 is considered reasonable, but even at that level
the impact amounts to a drop in income of 10% at thecertainty equivalent. Although a more rigorous analysis isneeded, including a definition of the utility function, it isfair to say that, when uncertainty is factored in, deterioration in employment climate has a greater negative impact
than does a reduction in wages when the employment
situation is stable.

30

Development Bank of Japan Research Report/ No. 35

(%)

5

2001
1999
1991

4
3
2
1
0
15-24

25-34

35-44

45-54

55-64

65 and overFigure 2-12. Probability of Involuntary Severance by Age GroupNote:
The darker shading indicates percentage unemployed after severance.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Special Survey of the Labour Force Survey.”

40
30
20
10
0
Total
-19
20-29
30-44
45-59
60 and over

-10
-20
-30
-40
-50
84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

Figure 2-13. Difference in Wages upon Changing Jobs: DI by Age Group
Percentage of individuals changing jobs whose wages rose more than 10% minus percentage whose wages dropped
more than 10%.
Source: Ministry of Health, Labour and Welfare, “Survey on Employment Trends.”
Note:

Development Bank of Japan Research Report/ No. 35

31

Let us consider the impact of these resultson lifetime income. As noted above, upon severance from a job, one’s relative lack of experience or even the very fact of having beenlaid off can act as an obstacle that cumulatively
heightens one’s employment risk. Moreover,the deterioration in employment climate is arelatively recent phenomenon that only became
pronounced in the 1990s. The impact of employment risk may differ only slightly amongage groups when viewed for a short span suchas a year, but the effect on lifetime risk is going
to be more serious on the younger generation,
which has a longer employment period ahead ofit. Although the explanatory variables such asactive opening rate used to gauge employment
climate in the calculations in Section 2 do reflect the short-term employment climate, they
do not really take account of impacts over thecourse of people’s future working life. The impact of a worsening employment climate on
lifetime income might be, as in the case of pensions, consistent with a generational effect thatcurbs consumption more the younger the agegroup.

workers have experienced a particularly severe
drop. Under the seniority system, these workers
are the most pampered in terms of salary andother benefits as long as they are employed. But
when major adjustments set in upon which thefate of the whole company hangs, their risk ofbeing laid off shoots up quickly. Then, once
they are turned out onto the labor market, theseniority advantages that they enjoyed within
the company evaporate, and they have to accept
far more stringent conditions.
In working out drop in expected income,figures for the amount by which annual income
fluctuates in each age group due to changes injobs were taken from the same survey as used
above. For probability of job change and unemployment the numbers for 2001 in Figure 2-12
were used (Table 2-3). The high probability ofseverance among the young, who are often
forced to change jobs, offsets the larger loss inincome experienced by older workers in jobchanges, with the result that the drop in expected income is roughly the same in all age
groups.

Table 2-3. Percentage Drop in Expected Income upon Severance by Age Group(in percent)
Probability of Job
ChangeProbability of
Unemployment

Overall Average

-24.5

1.82

1.08

1.18

29 and under

-11.2

2.26

0.99

1.04

30-39

-13.1

1.99

1.01

1.04

40-49

-17.7

1.66

1.02

1.03

50-59

-33.4

1.64

0.97

1.16

60 and over

-54.5

1.36

0.71

1.06

Note:

32

Probability of Severance

Difference inIncome upon
Changing Jobs

Drop in Expected
IncomeFor assumptions and sources, etc., see text and Figures 2-11 and 2-12.

Development Bank of Japan Research Report/ No. 35

III Generational Differences andFuture Consumption
1. Generational Differences in Asset
Ownership
In the previous chapter we saw how a downward revision in outlook for future income andincreasing uncertainty have an adverse effect on
consumption, particularly among those ofworking age. In this chapter we examine trends
in saving balances, which likewise fund consumption. While there is uncertainty in terms of
the yield on deposits, there is little uncertainty
when it comes to the principal itself, in part because people have become more risk-averse
these days. Moreover, although interest is close
to zero, real interest rates are in the plus column
once deflation is factored in. The household
sector owns a total of over 1,400 trillion yen infinancial assets, and holdings per capita also
remain solid (see Figure 1-16). These assets
have the potential to buoy up future consumption.
Figure 3-1 compares the ratio of annual
consumption expenditures to financial assets in
the Japanese and US household sectors.35 The
ratio has remained large steady in the US, while
in Japan it declined until 1989 as the economy
grew, reflecting historical differences in accumulation of assets.36 Then came the 1990s. In
the US the ratio dropped between 1994 and1999 because the denominator (financial assets)
35
This figure is equivalent to that obtained according to
the model in Figure 2-4 using the lifetime averages for amodel household and assuming no generational differences in population, income, etc. In that case savings forma triangle that peaks at retirement ( R ⋅ C ); thus, if ratio oflifetime average consumption to savings is 2/R with R=20,
the result is 0.1. The higher numbers in Figure 3-1 can be
explained by such factors as the greater contribution toeconomic growth of the younger generation, where theratio is higher, and the fact that the denominator does notinclude real assets, which are of comparable magnitude tofinancial assets.
36
By about 1990 the US and Japanese ratios stood ataround the same level. However, because of structural
discrepancies, including problems of definition and a difference in the ratio of financial to real assets, and because
the Japanese ratio underwent a fundamental shift in patternwith the collapse of the bubble, the two countries cannot
be said to have converged.

increased thanks to the rise in stock prices that
continued through the first half of 2000; since2000 it has again climbed as assets decline invalue. In Japan, meanwhile, the ratio has fallen
although asset prices shrunk following the collapse of the bubble economy at the beginning of
the 1990s. Japanese financial assets have thus
continued to grow over this period, evidently
because households have striven to cut back on
consumption expenditures and top up their savings. This ongoing reduction in spending andincrease in deposits, which followed in thewake of a dramatic plunge in Japan’s stock ofreal assets, form the backdrop to the ratio’s decline.
Even granted that Japan’s massive financial assets were built up as the result ofbelt-tightening, savings, which are intended tofund future consumption, are now double what
they were in 1980 relative to consumption expenditures. Below we consider the potential foran expansion in consumer spending, concentrating primarily on how formation and ownership of financial assets differ by age group.
First we examine ownership of assets byage of head of household and breakdown oftypes of assets at ten-year intervals beginning at
the end of 1970 (Figure 3-2). In terms of age,
there has been a straightforward shift in theform of a gradual increase in the percentage ofassets owned by the older generation. As can beseen from examining the individual cohorts, thegeneration of household heads aged 35-44 at
the end of 1970 has remained the largest holderof savings right through to the end of 2000,
when it reached age 65.
In terms of asset breakdown, stocks andbonds enjoyed a temporary surge at the end of
1990, but by the end of 2000 life insurance,
currency deposits, and term deposits had gained
ground. While stocks and bonds have consistently accounted for a high proportion of assets
owned by seniors, there has over the past decade been a rapid shift to term deposits. This
testifies to the considerable impact on investment patterns in the economy as a whole exerted by the increasingly risk-averse fund management of this generation, which after allowns such a large share of assets.

Development Bank of Japan Research Report/ No. 35

33

60

(%)

50
Japan
40
30
20

US

10
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00

Figure 3-1. Ratio of Consumption Expenditures to Financial Assets
1. Annual consumption expenditures divided by balance of financial assets at year’s end (nominal value).
2. The numbers for Japan through 1997 are from 68SNA; those for 1998 and subsequent years are based on theratio fluctuations in 93SNA.
3. US financial assets include those of private-sector non-profit organizations.
Sources: Cabinet Office, “System of National Accounts,” Bank of Japan, “Flow of Funds,”
US Department of Commerce, Survey of Current Business, and FRB, “Flow of Funds.”
Notes:

Figure 3-3 plots savings per household. As
Figure 3-3(1) shows, the rate of increase slowed
down in all age groups during the 1990s;
among those under thirty it actually showed noincrease. In the same decade net savings, savings minus liabilities, fell back to the level of1980 among those under fifty (Figure 3-3(2)).
Between 1990 and 2000 prices rose a total of
8.6% despite weakening inflation, which meansthat over the decade net savings declined inreal value among all age groups under sixty.
Seniors, who today own the largest shareof savings, experienced rapid growth in income
during their working years, and an unplanned
surge in savings appears to have contributed totheir buildup of assets. The increasing percentage of seniors in the population has also fueled
the concentration of financial assets seen in
Figure 3-2. Under these circumstances Japan’s
massive pool of financial assets fails to function
as a buffer for those of working age, amongwhom consumption has slumped noticeably. On
the contrary, the working generation has suffered a decline in the real value of its net assets.
However, purchase of a home accounts forthe lion’s share of the typical household’s financial liabilities,37 and when examining the37

34

According to the Survey of Savings Trends, which
Development Bank of Japan Research Report/ No. 35

household balance sheet one must consider thesignificance of such real assets. Their value isdifficult to assess since it is not uniquely determined, plus there is the problem of underreporting. Moreover, there are limits to the practicality of selling off something like a residence
to fund consumption. With respect to the latter,
the attractions of reverse mortgages have beenrehearsed repeatedly.38 Yet, as Ishikawa andfocuses on households with two or more members, liabilities for housing and land made up 86.0% of the balance ofliabilities as of the end of 2000. According to the Flow ofFunds Accounts, at the same point in time the balance of
housing-related debt accounted for 55.2% of total debt and
75.1% of debt excluding loans etc. relating to operation of
proprietorships.
38
A reverse mortgage is an arrangement whereby ahomeowner borrows money on a monthly basis on condition of transferring ownership of the land and buildings
upon death. It allows seniors to continue living in theirhomes while tapping the property’s future residual value
to fund consumption. In Japan certain local governments
and financial institutions started offering reverse mortgages in the 1980s, but the number of people taking advantage of them has been minuscule, because lenders arewary of the risk of longevity and find it difficult to determine interest rates and property values, while borrowers
face the risk of early death and are often unhappy with theassessed value of their homes. According to the National
Survey on Lifestyle Preferences, 21.9% of people are interested in reverse mortgages, of whom some 70% statedthat they would like to arrange.

End of 1970

End of 1980
100

100

Term
deposits

80
60

80
60

Life insurance
etc.

40

Life insurance
etc.

40

Currency deposits

20

Term deposits

Stocks andbonds

Currency deposits

20

0

Stocks and
bonds

0

0

20

40

60

80

100

0

20

40

60

80

100

-34

35 -44

45-54

55-64

65-

-34

35 -44

45-54

55-64

65-

(10.5% )(32.1% )(25.4% )(2 2.9% )(9.2 %)(9.6% )

(25.9% )(30.5% )(2 1.0% )(13.1 %)End of 1990

End of 2000
100

100
80

80

Term
deposits

Term deposits

60

60Life insurance
etc.

40

Life insurance
etc.

40

Currency deposits

20

20

Stocks and
bonds

0
0

20

40

Currency deposits
Stocks and bonds

0

60

80

0

100

20

40

60

80

100

-34

35 -44

45-54

55-64

65-

-34

35 -44

45-54

55-64

65-

(4.4% )

(17.8% )(24.1% )(2 7.6% )(26.1 %)

(3.4% )

(10.4% )(20.1% )(2 8.9% )(37.2 %)

Graph Data (Percentage of Total)
End of 1970
Term depositsLife insurance etc.
Currency deposits
Stocks and bonds

End of 1980
-34
3.8
2.5
2.0
1.4

35-44 45-54 55-64
11.7
8.6
9.4
7.6
6.4
4.5
4.3
3.7
3.1
6.5
5.0
5.4

653.3
1.5
1.4
2.8

Total
36.8
22.5
14.6
21.1

-34
4.7
2.0
1.1
1.0

35-44 45-54 55-64
13.6 14.8 10.6
5.9
6.3
3.6
2.3
2.8
1.9
3.0
5.4
4.6

656.6
1.8
1.5
3.0

Total
50.2
19.7
9.7
17.1
3.4

Non-financial institutions

0.7

1.9

1.7

0.5

0.1

4.9

0.7

1.1

1.1

0.3

0.2

Total

10.5

32.1

25.4

22.9

9.2 100.0

9.6

25.9

30.5

21.0

13.1 100.0

Term depositsLife insurance etc.
Currency deposits
Stocks and bonds

-34
1.9
1.3
0.4
0.5

35-44 45-54 55-64
7.2 10.3 12.2
5.9
7.0
6.7
1.4
1.8
1.8
2.6
4.4
6.3

Non-financial institutions

0.2

0.6

0.7

Total

4.4

17.8

24.1

End of 1990

End of 2000
-34 35-44 45-54 55-64
1.2
3.9
8.5 13.6
1.2
3.8
7.3
8.8
0.6
1.3
2.1
2.8
0.2
0.9
1.4
3.2

6510.7
4.0
1.7
9.5

Total
42.4
24.9
7.1
23.3

0.6

0.2

2.4

0.2

0.5

0.8

27.6

26.1 100.0

3.4

10.4

20.1

6520.1
7.6
4.2
5.0

Total
47.4
28.7
11.1
10.7

0.5

0.3

2.2

28.9

37.2 100.0

Figure 3-2. Ownership of Assets by Age of Head of Household and Breakdown of Types of Assets
1. The bottom tier of each graph represents savings at non-financial institutions.
2. In each graph the types of assets are listed in the column representing the age group owning the largest overall
share.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Family Savings Survey.”

Notes:Development Bank of Japan Research Report/ No. 35

35

(1) Savings(1) Net Savings(in tens of thousands of yen)
3000

3000

65〜
60〜64
50s
40s
30s
〜29

2500

(in tens of thousands of yen)
65〜
60〜64
50s
40s
30s
〜29

2500

2000

2000

1500

1500

1000

1000

500

500

0

0
80

82

84

86

88

90

92

94

96

98

80

00

82

84

86

88

90

92

94

96

98

00

Figure 3-3. Net Savings by Age GroupNote:
Net savings = savings – liabilities.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “Family Savings Survey,” savings
as of the end of each year

Yajima (2002) and Horioka et al. (2002) observe, seniors’ households prefer to dig into
their financial assets instead and typically plan
to leave behind a bequest roughly equivalent to
the market price of their real estate. Real assets
are viewed as something to bestow on the next
generation, and it is difficult to determine
whether or not they will eventually be channeled into consumption.39
Figure 3-4 shows value of assets, including
real assets, by generation. According to theseestimates, real assets exceed financial assets inall age groups, and intergenerational differences
are even more striking. Although the above
analysis suggests that there is still room for de39

This is based on Institute for Posts and Telecommunications Policy, “Survey of Household Choices of Financial
Assets.” As averaged out for age, income, region, andother categories, the typical value of a planned bequest is
equivalent to 70-100% of the market price of the real estate owned.
36

Development Bank of Japan Research Report/ No. 35

bate on the question of the connection between
real assets and stimulating consumption, thefact remains that the older the age group, thelarger its assets, both in terms of financial assets
alone and when real assets are added.40

40

This analysis is not an attempt to compare lifetime levelof wellbeing between generations. While the slowdown ineconomic growth has a greater negative impact on theyounger generation, that generation might also appear to
enjoy higher levels of income and consumption in absoluteterms. However, strictly speaking it is not possible tocompare different generations for lifetime level of wellbeing, even as limited to material satisfaction alone. Nonetheless, in discussions of public pensions and taxes, which
involve redistributing wealth between generations, morepractical standards, such as net sliding and generational
accounting, have been proposed that are sustainable andallow valuation in monetary terms, which helps in formulating consensus.

7000(in tens of thousands of yen)
Net assets (net savings + real assets)

6000
5000

Real assets
Liabilities
Savings

4000
3000
2000
1000
0
-1000

Net savings (savings – liabilities)-2000
Under 30

30s

40s

50s

60s

Over 70

Figure 3-4. Assets Including Real Assets
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications, “National Survey of Family Income and Expenditure.” (1999), Total households

10(%)
Over 70

9
8
7
6
20s
30s
40s

5
4

60s

3

50s

2
1
0
1995

1996

1997

1998

1999

2000

2001

Figure 3-5. Percentage Citing Bequests As Motive for Saving
Source: Central Council for Financial Services Information, “Public
Opinion Survey on Financial Assets of Households.”

It might be hoped that seniors would channel their plentiful savings into consumption, but,as Figure 3-5 indicates, older people have agreater tendency to cite the desire to leave abequest as their motive for saving. This may be
due to the loss of other reasons to consume, andit does not mean an actual increase in theamount people plan to leave in their wills.
However, individuals do not raise their consumption schedules for their remaining lifetime

even if they become aware of the extra savingsat their disposal; thus the consumption potentialof seniors households has increased, even taking into consideration such factors as longer life
expectancy. Certainly, bequests are one way touse financial assets,41 but if seniors’ purchasing
41

In terms of strategic motive, bequests are regarded ascountervalue for taking over one’s business, caring for one
in old age, providing company and so forth.

Development Bank of Japan Research Report/ No. 35

37

power is currently not being activated, thenopportunities for economic growth and, by extension, for income gains are being lost.
The above discussion uses averages foreach age group. It should be noted, however,that differences in amount of savings withineach age group increase with age. Figure 3-6
shows amount of savings within each age groupby percentile. While amount of savings at any
given quantile increases the older the generation, so too does the absolute gap in savings
within each generation. This can be attributed
to the cumulative effect of income differences
as well as to property inherited from the parent’s generation.

This intragenerational gap widened
throughout the 1990s. Even though financial
assets have on average grown (see Figure 1-16),
the percentage of households stating that theirsavings have decreased is on the rise, as Figure
3-7 reveals.42 This tendency can be observed inevery age group including seniors (Figure
3-7(2)); indeed, intragenerational differences
appear to be widest among seniors, which is thevery age group that has traditionally had themost savings on average. While one should
keep in mind that each generation is not completely homogeneous, it is to be hoped that thepurchasing power of wealthy seniors in particular can be tapped.

(in tens of thousands of yen)

7000

Over 65

6000

60〜64

5000

55〜59

4000

50〜54
45〜49

3000

40〜44

2000

35〜39
30〜34

1000

25〜29

0

Under 25

0

20

40
60
Percentile

80

100

Figure 3-6. Distribution of Savings within Age Groups
1. This graph plots amount of savings at the 10, 25, 50, 75, and 90% quintile fromthe bottom as joined together in a smooth line.
2. As of the end of 2000.
Source: Ministry of Public Management, Home Affairs, Posts and Telecommunications,“Family Savings Survey.”

Notes:

42

Among the main reasons for the decrease are lower
earnings, the cost of paying for one’s children’s educationand marriages, and purchase of durable goods, althoughfalling income is the only reason to show a long-term risein percentage. An increase in the percentage of seniors
digging into their savings does not appear a likely cause.
38

Development Bank of Japan Research Report/ No. 35

(1) Overall
100
90
80
70

(%)

55
Decreased
Unchanged
Increased

50
45

60

40

50

35

40

30

30

(2) Individual Age Groups

(%)

25

20

20

10

15

0
89 90 91 92 93 94 95 96 97 98 99 00 01

91

92

93

94
20s
40s
60s

95

96

97

98 99 00
30s
50s
70s and older

01

Figure 3-7. Change in Savings Compared to One Year Before
Source: Central Council for Financial Services Information, “Public Opinion Survey on Financial Assets of Households.”

2. Concluding Remarks
It can be argued that, by being cautious about
the future, Japanese households are adapting tochanges in economic climate while keeping
their finances on a sound footing. The tendency
to use durable goods for longer and the growing
inclination to choose less expensive goods andservices can be interpreted as ways to improve quality of consumption in the face ofstagnating incomes. However, the past several
years have seen a rise in the percentage ofJapanese stating that their living standards havedeteriorated. It is therefore vital to boost consumption.
Curtailed spending by individual households also has an adverse effect on the income
and employment environment by undermining
overall consumer demand. Accounting as it
does for almost 60% of total demand, consumption in its own right exerts a massive impact on
production, and thus income; because of thisself-fulfilling nature, worsening prospects forhousehold finances have the effect of shrinking
the economy even further.
One promising potential catalyst for ashort-term consumer recovery is spending byseniors. Steps in that direction that can be immediately implemented include taking meas-ures to reduce physical and psychological burdens on seniors that may impede social behaviors necessary for consumption, and offering
goods and services that appeal to their tastes.
Increasing seniors’ freedom to dispose of theirassets by overhauling inheritance and gift taxes
would also motivate older consumers to unleash
their purchasing power.
On the other hand, a full-fledged consumer
recovery will require policies to improve lifetime income prospects, especially for those ofworking age. If risk scenarios are already negatively affecting consumption, then reducing
uncertainty by clearly defining losses might
benefit long-term consumption trends. Meanwhile pressure is increasing to reduce laborcosts; if that results in cutbacks in new hiringand modifications to the seniority curve, theupshot could well be further burdens on theyounger generation, which looks forward to
gains in income in the many working years
ahead of it. Future prospects for this age groupare under growing threat from, among otherthings, a deterioration in public pension funds
and government finances. While further investigation is required to identify more specificallythe determining factors behind the generational
effect on propensity to consume, action willcertainly be needed to stimulate spending

Development Bank of Japan Research Report/ No. 35

39

among today’s younger generation as well as
future generations, on whom production andconsumption will eventually depend.
One policy option for the future economic
environment is a revision of the policy of redistributing resources through public pensions andtaxes. Justifying that option from the perspective of fairness and public welfare might appear
difficult both technically and politically as longas the focus remains exclusively on the immediate benefits of redistribution. But if redistribution helps fuel consumption, the resulting

40

Development Bank of Japan Research Report/ No. 35

economic growth could improve the wellbeingof broad groups of the population. The same
holds true of the changes under way in employment practices and wage structures at thecorporate level: establishing a system of compensation that acts as an incentive to the young
people who will take charge of future production promises to deliver beneficial results on
both the supply and demand sides. The need isfor economic stimulus measures that transcend
short-term conflicts between different age andincome groups.

Supplementary Table
Impact of Employment Risk on Income in Risk-Averse Households

Status Quo
Severance Job Change
Unemployment

97.1
1.8

Income
1.000
0.740

1.1

0.350

RRA

2

Certainty Equivalent

100.0

(a)

(a)

0.97 0.96 0.92 0.87 0.66 0.55

Probability (%)

Notes:

Value of (a) According to Levelof Relative Risk Avoidance (RRA)
3

4

5

8

10

1. The data in the left-hand table were used in compiling Figure 2-11. See Note 33 for an explanation.
2. The figures in the right-hand table were calculated using the following CRRA utility function:
U(C)=(C1-RRA-1)/(1-RRA)

Development Bank of Japan Research Report/ No. 35

41

References(In Japanese)
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44

Development Bank of Japan Research Report/ No. 35

List of Back Numbers (Including JDB Research Report)
No. 35 Concerns for the Future and Generational Consumption Behavior (this issue)
No. 34 Prospects and Challenges Surrounding Japan’s Electrical Equipment Industry: General Electrical
Equipment Manufacturers’ Restructuring of Operations and Future Prospects, November 2002
No. 33 Survey on Planned Capital Spending for Fiscal Years 2001, 2002 and 2003, November 2002
No. 32 Behavior Trends of Japanese Banks toward the Corporate Sector and Their Impact on the Economy, October 2002
No. 31 Microstructure of Investment and Employment Dynamics: Stylized Facts of Factor Adjustment
Based on Listed Company Data, October 2002
No. 30 Recent Trends in the Japanese Economy: Globalization and the Japanese Economy, August 2002
No. 29 Corporate Financing Trends in Recent Years: Fund Shortages and Repayment Burden, August
2002
No. 28 Urban Renewal and Resource Recycling: For the Creation of a Resource Recycling Society, July
2002
No. 27 Labor’s Share and the Adjustment of Wages and Employment, June 2002
No. 26 Survey on Planned Capital Spending for Fiscal Years 2001 and 2002, May 2002
No. 25 Environmental Information Policy and Utilization of Information Technology: Toward a Shift inEnvironmental Policy Paradigm, March 2002
No. 24 The Changing Structure of Trade in Japan and Its Impact: With the Focus on Trade in Information Technology (IT) Goods, March 2002
No. 23 Microstructure of Persistent ROA Decline in the Japanese Corporate Sector: Inter-company
Disparties and Investment Strategies, March 2002
No. 22 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation and Prospects
of Evolution, February 2002
No. 21 Survey on Planned Capital Spending for Fiscal Years 2000, 2001 and 2002, December 2001
No. 20 Current Situation and Challenges for Cable Television in the Broadband Era, October 2001
No. 19 Recent Trends in the Japanese Economy: The Japanese Economy under Deflation, August 2001
No. 18 Introduction of a Home Appliance Recycling System: Effects & Prospects: Progress towards
Utilisation of Recycling Infrastructure, June 2001
No. 17 Survey on Planned Capital Spending for Fiscal Years 2000 and 2001, June 2001
No. 16 Revitalization of Middle-aged and Elderly Workers in Japan’s Labor Markets: Requiring the
Expansion of the Vocational Training Functions, March 2001
No. 15 Risk-Averting Portfolio Trends of Japanese Households, March 2001
No. 14 Consumption Demand Trends and the Structure of Supply: Focus on Retail Industry Supply Behavior, March 2001
No. 13 Recent Trends in the Japanese Economy: Weakness of Current Economic Recovery and Its
Background, March 2001
No. 12 Empirical Reassessment of Japanese Corporate Investment Behavior: Features and Changes
since the 1980s, based on Micro-level Panel Data, March 2001
No. 11 Survey on Planned Capital Spending for Fiscal Years 1999, 2000 and 2001, October 2000
No. 10 Job Creation and Job Destruction in Japan, 1978-1998: An Empirical Analysis Based on Enterprise Data, September 2000
No. 9

Recent Trends in the Japanese Economy: Information Technology and the Economy, September

2000
No. 8

Trend of International Reorganization Affecting the Japanese Automobile and Auto Parts Industries, June 2000

No. 7

Survey on Planned Capital Spending for Fiscal Years 1999 and 2000, June 2000

No. 6

Current Status and Future Perspective of the Japanese Remediation Industry: Technology andMarket for Underground Remediation, May 2000

No. 5

Recent Trends in the Japanese Economy: The 1990s in Retrospect, March 2000

No. 4

Destabilized Consumption and the Post-bubble Consumer Environment, February 2000

No. 3

The Slump in Plant and Equipment Investment in the 1990s: Focusing on Lowered Expectations,the Debt Burden and Other Structural Factors, January 2000

No. 2

Survey on Planned Capital Spending for Fiscal Years 1998, 1999 and 2000, November 1999

No. 1

Corporate Strategies in Japan’s Semiconductor Industry: Implications of Development in Other
Asian Countries, November 1999

JDB Research Report
No. 96 Recent Trends in the Japanese Economy: Focused on Fixed Investment and Capital Stock, August 1999
No. 95 Efforts to Protect the Natural Environment in the United States and Germany: Environmental
Mitigation and Biotope Conservation, July 1999
No. 94 Survey on Planned Capital Spending for Fiscal Years 1998 and 1999, June 1999
No. 93 Towards the realization of ‘environmental partnership’: A survey of Japan’s environmental NPO
sector through comparison with Germany, June 1999
No. 92 The Impact of Demographic Changes on Consumption and Savings, March 1999
No. 91 Recent Research and Development Trends in Japanese Enterprises: Technology Fusion, March
1999
No. 90 Recent Trends in the Japanese Economy: Prolonged Balance Sheet Adjustment, January 1999
No. 89 Impact of Asset Price Fluctuations on Household and Corporate Behavior: A Comparison between Japan and the U.S., December 1998
No. 88 Survey on Planned Capital Spending for Fiscal Years 1997, 1998, and 1999, December 1998
No. 87 Foreign Exchange Rate Fluctuations and Changes in the Input-Output Structure, November 1998
No. 86 Structural Changes in Unemployment of Japan: An Approach from Labor Flow, November 1998
No. 85 Recent Trends in the Japanese Economy: Characteristics of the Current Recession, August 1998
No. 84 R&D Stock and Trade Structure in Japan, August 1998
No. 83 Survey on Planned Capital Spending for Fiscal Years 1997 and 1998, August 1998
No. 82 The Significance, Potential, and Problems of DNA Analysis Research: Establishing Public Acceptance is Essential, May 1998
No. 81 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996, 1997
and 1998 Conducted in August 1997, March 1998
No. 80 Recent Trends in the Japanese Economy: Growth Base of the Japanese Economy, January 1998
No. 79 Information Appliances: The Strength of Japanese Companies and Tasks for the Future, January
1998
No. 78 Challenges and Outlook for the Japanese Machinery Industries: Impact of ISO14000 Series andEnvironmental Cost, January 1998
No. 77 Current Conditions and Issues of Computerization in the Health Care Industry: For the Construction of a Health Care Information Network, January 1998
No. 76 Household Consumption and Saving in Japan, December 1997
No. 75 The Direction of Japanese Distribution System Reforms: Strengthening the Infrastructure to
Support Diverse Consumer Choices, November 1997
No. 74 Foreign Direct Investments by Japanese Manufacturing Industries and Their Effects on International Trade, October 1997
No. 73 The Impact of the Changing Trade Structure on the Japanese Economy: With Special Focus on
the Effects on Productivity and Employment, October 1997
No. 72 An Analysis of Foreign Direct Investment and Foreign Affiliates in Japan, August 1997
No. 71 Recent Trends in the Japanese Economy: Stock Replacement and New Demand as Aspects of
Economic Recovery, August 1997
No. 70 Corporate Fundraising: An International Comparison, June 1997
No. 69 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and1997 Conducted in February 1997, May 1997
No. 68 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1996 and1997 Conducted in August 1996, August 1997
No. 67 An International Comparison of Corporate Investment Behavior: Empirical Analysis Using Firm
Data from Japan, France and the US, April 1997
No. 66 Housing in the National Capital: Analysis of the Market for Housing using Micro Data, March
1997
No. 65 The Environment for Locating Business Operations in Major East Asian Cities, January 1997
No. 64 Direction of Reconstruction of Business Strategy in the Chemical Industry, January 1997
No. 63 Reflection on Discussions Concerning Regulation of the Electric Power Industry: Deregulationof the Electric Power Industry in Japan and Implication of Experiences in the United States,
December 1996
No. 62 Current Status and Future Perspective of the Japanese Semiconductor Industry, November 1996
No. 61 A Breakthrough for the Japanese Software Industry?: Responsiveness to Users’ Needs is the key,
October 1996
No. 60 Recent Trends in the Japanese Economy Focusing on the Characteristics and Sustainability of
the Current Economic Recovery, September 1996
No. 59 Analysis of the Primary Causes and Economic Effects of Information: Related investment in the
United States and Trends in Japan, August 1996
No. 58 Selected Summaries of Research Reports: Published in FY1995, June 1996
No. 57 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1995 and1996 Conducted in February 1996, May 1996
No. 56 Recent Trends in the Japanese Economy, May 1996
No. 55 Issues Concerning the Competitiveness of the Japanese Steel Industry, February 1996
No. 54 Changes in the Financial Environment and the Real Economy, January 1996
No. 53 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994, 1995
and 1996 Conducted in August 1995, October 1995
No. 52 Current Economic Trends: Focusing on the Appreciation of the Yen and its Effects, October

1995
No. 51 Problems Concerning the International Competitiveness of the Petrochemical Industry, October
1995
No. 50 An Economic Approach to International Competitiveness, October 1995
No. 49 Selected Summaries of Research Reports Published in FY1994, July 1995
No. 48 Strategies for Improving the Efficiency of the Japanese Physical Distribution System: Part 2,
July 1995
No. 47 Issues on International Competitive Strength of the Auto Industry, June 1995
No. 46 Problems Concerning the International Competitiveness of the Electronics and Electric Machinery Industry, June 1995
No. 45 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1994 and1995 Conducted in March 1995, June 1995
No. 44 Strategies for Improving the Efficiency of the Japanese Physical Distribution System, March
1995
No. 43 Capital Spending Recovery Scenario Cycle and Structure, August 1994
No. 42 Progress of International Joint Development between Industrialized Countries on the Private
Level, May 1994
No. 41 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993, 1994
and 1995 Conducted in August 1994 , November 1994
No. 40 Selected Summaries of Research Reports Published in FY1993, June 1994
No. 39 Recent Trends in Japan’s Foreign Accounts, April 1994
No. 38 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1993 and1994 Conducted in March 1994, April 1994
No. 37 Economic Zones and East Asia Prospect for Economic Activity Oriented Market Integration,
December 1993
No. 36 Japanese Corporate Responses to Global Environmental Issues, December 1993
No. 35 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992, 1993
and 1994 Conducted in August 1993, September 1993
No. 34 Structure of Profit to Capital in the Manufacturing Industry, September 1993
No. 33 Comparison of the Japanese and The U.S. Labor Markets, October 1992
No. 32 The Relative Competitiveness of U.S., German, and Japanese Manufacturing, March 1993
No. 31 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1992 and1993 Conducted in March 1993, April 1993
No. 30 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991, 1992
and 1993 Conducted in August 1992, December 1992
No. 29 Flow of Funds in the 80s and Future Corporate Finance in Japan, November 1992
No. 28 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1991 and1992 Conducted in February 1992, April 1992
No. 27 An Analysis of Foreign Direct Investment in Japan, March 1992
No. 26 Projection of Japan's Trade Surplus in 1995: Analysis of Japan's Trade Structure in the 80s,
February 1992
No. 25 Intra-Industry Trade and Dynamic Development of The World Economy, November 1991

No. 24 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990, 1991
and 1992 Conducted in August 1991, September 1991
No. 23 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1990 and1991 Conducted in February 1991, March 1991
No. 22 Trends of the Petrochemical Industry and its Marketplace in East Asia, March 1991
No. 21 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989, 1990
and 1991 Conducted in August 1990, September 1990
No. 20 Deepening Economic Linkages in The Pacific Basin Region: Trade, Foreign Direct Investment
and Technology, September 1990
No. 19 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1989 and1990 Conducted in February 1990, March 1990
No. 18 Petrochemicals In Japan, The US, and Korea an Assessment of Economic Efficiency, February
1990
No. 17 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1988, 1989
and 1990 Conducted in August 1989, October 1989
No. 16 Impact of the EC Unification on Japan’s Automobile and Electronics Industries, August 1989
No. 15 Industrial and Trade Structures and the International Competitiveness of Asia’s Newly
Industrializing Economies, August 1989
No. 14 The Japan Development Bank Reports on Capital Investment Spending: Survey for Fiscal Years
1988 and 1989 Conducted in February 1989, March 1989
No. 13 The Japan Development Bank Reports on Capital Spending: Survey for Fiscal Years 1987, 1988
and 1989 Conducted in August 1988, September 1988
No. 12 Growing Foreign Investors’ Activities and the Future of Internationalization, September 1988
No. 11 Futures Tasks and Prospects for the Japanese Machine-Tool Industry, July 1988
No. 10 International Division of Labor in the Machine Industries Among Japan, Asia’s NICs and
ASEAN Countries, June 1988
No. 9

Trends of the Petrochemical Industry and its Marketplace in East Asia around Japan, May 1988

No. 8

The International Competitiveness of Japan and U.S. in High Technology Industries, April 1988

No. 7

The Japan Development Bank Reports on Private Fixed Investment in Japan, March 1988

No. 6

Economic Projections of the Japan’s Economy to the Year 2000, February 1988

No. 5

The Japan Development Bank Reports on Private Fixed Investment in Japan, September 1987

No. 4

Current Trends in the Japanese Auto Parts Industry in Overseas Production, July 1987

No. 3

Current Moves for Foreign Direct Investment into Japan, May 1987

No. 2

Overseas Direct Investments by Japanese Corporations, May 1987

No. 1

Current U.S. Consumption Trends, May 1987