GCOE Discussion Paper Series
Global COE Program

Human Behavior and Socioeconomic Dynamics
Discussion Paper No. 287

Recent Trends in Consumption in Japan and the Other Group of
Seven (G7) Countries

Charles Yuji Horioka

December 2012GCOE Secretariat
Graduate School of Economics

OSAKA UNIVERSITY

1-7 Machikaneyama, Toyonaka, Osaka, 560-0043, Japan

Recent Trends in Consumption in Japan and the Other Group of
Seven (G7) Countries*
Charles Yuji Horioka**Institute of Social and Economic Research, Osaka University, Ibaraki, Osaka, JAPAN, andNational Bureau of Economic Research, Inc., Cambridge, Massachusetts, U.S.A.
December 2012
Abstract: In this paper, we present data on recent trends in private consumption and inpossible determinants of private consumption (such as GDP, household incomes, householdsaving rates, household wealth, and employment conditions) in the Group of Seven (G7)countries and find that there has been significant variability among the G7 countries not
only in their private consumption growth rates but also in the determinants of private
consumption growth during the 2002-07 period.

With respect to Japan, we find thatprivate consumption has been relatively stagnant during the 2002-07 period and that thestagnation of private consumption has been due to the stagnation of household income andof household wealth and the relative stability of the household saving rate.
Keywords: Consumption; private consumption; GDP; economic growth; households; saving;
wealth; employment conditions; unemployment rates; Group of 7 (G7); Japan.

JEL classification numbers: D12, E21, E60, J64
Forthcoming in the Journal of the Asia Pacific Economy, vol. 18, no. 3 (June 2013).
*This research was conducted as part of the Social Resilience Project 2011 of the Pacific
Economic Cooperation Council (PECC) and the Japan Institute of International Affairs(JIIA), and the author is grateful to Dr. Yoko Niimi, Ambassador Yoshiji Nogami, the otherparticipants of the Pacific Economic Cooperation Council (PECC) International Workshop on
Social Resilience Project 2011, held on July 12, 2011, at Plaza Hall, Kasumigaseki Building,Tokyo, Japan, and of the Twentieth General Meeting of the Pacific Economic Cooperation
Council (PECC): State of the Region, held on September 29, 2011, at the Madison Hotel,
Washington, D.C., U.S.A., the Guest Editor Noel Gaston, and an anonymous referee for theirhelpful comments.
**Contact information: Institute of Social and Economic Research, Osaka University, 6-1,
Mihogaoka, Ibaraki, Osaka 567-0047, JAPAN.
Facsimile: 81-6-6879-8575.

Telephone: 81-6-6879-8586 or 8574.

Email: horioka@iser.osaka-u.ac.jp

1. Introduction
The Japanese economy has been in a prolonged recession for most of the past two
decades (Japan’s so called “Lost Decades”), and private consumption has been stagnant
for most of this period along with the other components of GDP. However, as Horioka(2006) shows, the stagnation of public and private investment has been even more
pronounced than the stagnation of private consumption.
Even during the relatively prosperous period between the Asian financial crisis of
1997-98 and the global financial crisis of 2008-09, the Japanese economy has been
relatively stagnant, with private consumption being no exception. In this paper, we
present data on recent trends in private consumption growth in Japan and the otherGroup of Seven (G7) countries (Canada, France, Germany, Italy, the United Kingdom,
and the United States) during the 2002-09 period and explore the reasons for why
private consumption was stagnant in Japan compared to the other G7 countries. We
compare Japan to the other G7 countries because of their importance in the world
economy and because we wanted to compare Japan to countries at a similar stage of
economic development and with similar market systems.
This paper is organized as follows: In section 2, we present data on recent trends inprivate consumption in the G7 countries, and in section 3, we present data on recent
trends in possible determinants of private consumption (such as GDP, householdincomes, household saving rates, household wealth, and employment conditions) in theG7 countries in order to shed light on the reasons for differences among the G7
countries in recent trends in private consumption.

Section 4 is a brief concluding

section that summarizes and makes policy prescriptions.
To preview the main findings of this paper, we find that there has been significant
variability among the Group of Seven (G7) countries not only in their private
consumption growth rates but also in the determinants of private consumption growthduring the 2002-07 period, with the relative importance of GDP growth, householdincome growth, household saving rates, household wealth, and employment conditions
varying from country to country.

With respect to Japan, we find that private

consumption has been relatively stagnant during the 2002-07 period and that thestagnation of private consumption has been due to the stagnation of household income1and of household wealth and the relative stability of the household saving rate.
2. Trends in Private Consumption Growth
Table 1 shows, among other things, data on the average annual real growth rate ofprivate consumption in the G7 countries during the 2002-07 and 2007-09 periods (withthe countries arranged from highest to lowest with respect to growth rates in 2002-07).
As can be seen from the table, there were substantial differences among the G7
countries in private consumption growth rates in both periods. During the 2002-07
period, private consumption increased fastest in Canada (3.74 percent) and the UnitedStates (2.98 percent), relatively fast in the United Kingdom (2.44 percent) and France(2.09 percent), and slowest in Japan (1.30 percent), Italy (1.05 percent), and Germany(0.33 percent).
During the 2007-09 period, the average annual private consumption growth rate waslower than during the 2002-07 period in all of the G7 countries due to the advent of the
global financial crisis, with four of the G7 countries (Italy, Japan, the United Kingdom,
and the United States) showing negative private consumption growth rates and only
three of the G7 countries (Canada, France, and Italy) showing positive private
consumption growth rates.

However, the rank ordering of the G7 countries withrespect to private consumption growth remained largely unchanged, with Canada still
showing the highest average annual private consumption growth rate, France still
ranking relative high, and Italy and Japan still ranking relatively low. Germany risesin the rankings, while the United Kingdom and the United States fall in the rankings.
Thus, private consumption growth rates varied considerably among the G7 countries
during both time periods, but the differences among the G7 countries were relatively
stable.
3. Determinants of Private Consumption Growth
In the previous section, we found that there have been substantial and stabledifferences among the G7 countries in private consumption growth rates.

In thissection, we attempt to shed light on the reasons for these substantial differences.
However, we confine our analysis to the 2002-07 period for two reasons—first, because
sectoral data (in particular, data on the household sector) are still not yet available for2the most recent period, and second because the 2002-2007 period was a relatively
prosperous period between the Asian financial crisis and the global financial crisis andit is important to understand why private consumption growth was relatively stagnant
in Japan even during this period of global prosperity.
(1) GDP Growth
Arguably, the most important determinant of private consumption growth rates is the
GDP growth rate. Table 1 shows data on real GDP growth rates alongside data on real
private consumption growth rates in the G7 countries during the 2002-07 and 2007-09
periods. As can be seen from this table, there is, in fact, a high correlation between
private consumption growth rates and GDP growth rates.

Moreover, private

consumption growth rates roughly equal GDP growth rates in many countries,
including France (2.09 vs. 2.00 percent), Italy (1.05 vs. 1.14 percent), the United
Kingdom (2.44 vs. 2.68 percent), and the United States (2.98 vs. 2.75 percent).
However, private consumption growth rates exceed GDP growth rates by a considerable
margin in some countries such as Canada (3.74 vs. 2.61 percent) and fall short of GDP
growth rates by a considerable margin in some countries such as Germany (0.33 vs. 1.55
percent) and Japan (1.30 vs. 2.10 percent) (all figures pertain to the 2002-07 period).
Thus, GDP growth rates are apparently not the only determinant of private
consumption growth rates.
(2) Household Income Growth
Another determinant of private consumption growth rates is the growth rate of net
household disposable income, and it is quite possible that it is a more important
determinant of private consumption growth rates than GDP growth rates becausehouseholds finance their consumption primarily from net household disposable income.
Table 1 shows data on the average annual real growth rate of net household disposable
income (deflated by the price deflator for private consumption) in the G7 countries
during the 2002-07 period in addition to showing data on the average annual real
growth rates of private consumption and GDP during the same time period, and as canbe seen from this table, there is a high correlation between GDP growth rates andhousehold income growth rates, with the two being roughly equal in many countries
including France (2.00 vs. 1.94 percent) and the United States (2.75 vs. 2.61 percent).

3However, there are some notable exceptions: the average annual household income
growth rate was considerably higher than the average annual GDP growth rate (3.52 vs.
2.61 percent) in Canada during the 2002-07 period, and the fact that the average annual
private consumption growth rate was higher than the average annual GDP growth rate
in Canada (3.74 vs. 2.61 percent) during the 2002-07 period can be explained by the factthat the average household income growth rate was higher than the average GDP
growth rate in that country during this period.
Conversely, the average annual household income growth rate was considerably lower
than the average annual GDP growth rate in Germany (0.40 vs. 1.55 percent) andJapan (1.00 vs. 2.10 percent) during the 2002-07 period, and the fact that the averageannual private consumption growth rate was lower than the average annual GDP
growth rate in Germany (0.33 vs. 1.56 percent) and Japan (1.30 vs. 2.10 percent) during
the 2002-07 period can be explained by the fact that the average annual householdincome growth rate was lower than the average annual GDP growth rate in thesecountries during this period. Thus, not surprisingly, household income growth rates
appear to be much better at explaining private consumption growth rates than GDP
growth rates.
(3) Household Saving Rates
Another possible determinant of consumption growth rates is the household saving rate.
Private consumption growth rates will exceed household income growth rates if thehousehold saving rate is declining over time and conversely. In order to shed light on
the importance of trends over time in the household saving rate as a determinant ofprivate consumption growth rates, we present data on trends over time in the householdsaving rate and on the net change in household saving rate in the G7 countries during
the 2002-07 period in Table 2.
As can be seen from this table, the level of the household saving rate varies greatly
among the G7 countries, being relatively high in France, Germany, and Italy (8.22 to
13.66 percent), relatively low in Japan, Canada, and the United States (1.48 to 5.09
percent), and negative (-0.05 to -4.27 percent).in the United Kingdom in all years but
one (2003, when it was 0.43 percent). More importantly, the G7 countries also show
substantial variation in the net change in the household saving rate during the 2002-07
period, with only Germany showing an increase (0.87 percentage points), Canada,
4

Japan, France, and the United States showing relatively moderate declines (-0.96, -1.31,
and -1.93 percentage points, respectively), and Italy and the United States showing
relatively sharp declines (-3.14 and -4.21 percentage points, respectively).
The relatively sharp declines in the household saving rates of Italy and the United
Kingdom can explain why private consumption growth rates exceeded householdincome growth rates in Italy and the United Kingdom (1.05 vs. 0.51 percent in Italy and2.44 vs. 1.14 percent in the United Kingdom). Thus, trends in household saving rates
can explain the divergence between private consumption growth rates and householdincome growth rates in some cases.
This factor was not so important in Japan because the decline in its household savingrate was not so sharp (-1.31 percentage points), as a result of which its private
consumption growth rate was only slightly (0.30 percentage points) higher than its
household income growth rate during the 2002-07 period. To put it another way, one
reason for the stagnation of consumption in Japan during the 2002-07 period is the factthat the household saving rate declined only moderately during this period, due
perhaps to increasing precautionary saving brought about by increased pessimism
about the future.
(4) Household WealthPrivate consumption growth will also be influenced by changes in household wealth,with increases (decreases) in household wealth due to capital gains (losses) on equities,
land, and other assets causing private consumption to increase (decrease) by more thanwould be expected by GDP growth, household income growth, and trends in householdsaving rates.
Table 3 shows data on the ratio of net household wealth to net household disposable
income in 2002 and 2007 and the net change in this ratio during the 2002-07 period in
the G7 countries. As can be seen from this table, household wealth increased sharply
in France (by 235.0 percentage points of household income) and the United Kingdom (by185.2 percentage points of household income), moderately in Italy (by 109.5 percentage
points of household income), the United States (by 101.4 percentage points of householdincome), and Germany (by 94.0 percentage points of household income), and least
sharply in Canada (by 35.8 percentage points of household income) and Japan (by 15.9
5

percentage points of household income).
Thus, the sharp increase in household wealth in the United Kingdom (by 185.2
percentage points of net household disposable income) during the 2002-07 period can
explain the strong private consumption growth in the U.K. (2.44 percent), and inparticular, why the average annual private consumption growth rate during the
2002-07 period was much higher than the average annual household income growthrate during the same period (2.44 vs. 1.14 percent).
By contrast, the stagnation of household wealth in Japan (it increased by only 15.9
percentage points of household disposable income during the 2002-07 period) can
explain why private consumption growth was relatively weak during this same period(1.30 percent).
(5) Employment Conditions
Private consumption growth will also be influenced by employment conditions, with an
improvement in (deterioration of) employment conditions leading to higher (lower)
private consumption growth than predicted by other factors.
Table 4 shows data on unemployment rates in 2002 and 2007 and the change in theunemployment rate during the 2002-07 period in the G7 countries. As can be seenfrom this table, employment conditions improved in most G7 countries during the
2002-07 period, with unemployment rates declining by 2.6 percentage points in Italy,
1.7 percentage points in Canada, 1.6 percentage points in Japan, and 1.2 percentage
points in the United States, not changing at all in Germany, and increasing by 0.1
percentage points in France and 0.2 percentage points in the United Kingdom during
the 2002-07 period.
A comparison of column (3) of Table 1 and column (3) of Table 4 shows that there is little
correlation between private consumption growth rates and changes in unemployment
rates. The fact that Canada showed the second largest improvement in unemployment
rates (1.7 percentage points) as well as the highest growth rate of private consumption(3.74 percent) during the 2002-07 period suggests that there is a positive correlation
between the two, but the fact that Italy showed by far the largest improvement inunemployment rates (2.6 percentage points) even though it showed the second lowest
6

growth rate of private consumption (1.05 percent), whereas the United Kingdom was
one of only two countries showing a deterioration in their unemployment rates (by 0.2
percentage points) even though it showed the third highest growth rate of private
consumption (2.44 percent) suggests that there is a negative correlation between thetwo.
Japan ranked third with respect to the improvement in unemployment rates (a declineof 1.6 percentage points) but only fifth with respect to the growth rate of private
consumption (1.30 percent), suggesting that the improvement in employment conditions
did not do much to boost private consumption growth in Japan.
(6) Conclusion concerning the Determinants of Private Consumption Growth
In this paper, we showed that private consumption growth is determined by trends in
GDP growth, household income growth, household saving rates, household wealth, andemployment conditions but that the relative importance of these factors differs greatly
from country to country.
For example, in the case of Japan, we found that the stagnation of consumption during
the 2002-07 period was due to the stagnation of household income (which was much
more stagnant than GDP), the stagnation of household wealth, and the relative stabilityof the household saving rate (which was presumably due in large part to increased
pessimism about the future).
Similarly, private consumption was the most stagnant in Germany due primarily to thestagnation of household income (which was much more stagnant than GDP) and due
partly to a moderate increase in its household saving rate.
France showed an intermediate growth rate of private consumption because its
household income growth rate was also intermediate, but its private consumption
growth rate was somewhat higher than its household income growth rate presumably
because France showed by far the largest increase in household wealth.
By contrast, the strong growth of private consumption in Canada and the United States
was due primarily to the strong growth of household income (far in excess of GDP
growth in the case of Canada) and due partly to moderate declines in their household
7

saving rates and (in the case of Canada) a sharp improvement in employment
conditions.
The most interesting cases are the cases of Italy and the United Kingdom, whichshowed considerably higher growth rates of private consumption than of householdincomes due in large part to the sharp decline in their household saving rates and(especially in the case of the United Kingdom) sharp increases in household wealth.

4. Summary and Policy Implications
In this paper, we presented data on recent trends in private consumption and inpossible determinants of private consumption (such as GDP, household incomes,
household saving rates, household wealth, and employment conditions) in the G7
countries and found that there has been significant variability among the Group of
Seven (G7) countries not only in their private consumption growth rates but also in thedeterminants of private consumption growth during the 2002-07 period, with therelative importance of GDP growth, household income growth, household saving rates,
household wealth, and employment conditions varying from country to country.
With respect to Japan, we found that private consumption has been relatively stagnant
during the 2002-07 period and that the stagnation of private consumption has been due
to the stagnation of household income and of household wealth and the relative stabilityof the household saving rate.
This suggests that the best way of stimulating private consumption and of bringing
about a recovery of the Japanese economy as a whole would be to boost householdincome and household wealth.

However, given that Japan’s government debt isalready dangerously high (in excess of 200 percent of GDP, making Japan’s government
debt the highest among the developed countries as a ratio of GDP) and that there islittle scope for further monetary easing, it seems that targeted policies would be more
realistic and more effective than macroeconomic policies. For example, policies that
redistribute income toward the low-income and others with high marginal propensities
to consume, such as policies that create more job opportunities and more opportunities
for vocational training for young workers (whose unemployment rates are still very8high) and policies that improve the wages and other benefits and working conditions ofpart-time and temporary workers (whose share has been increasing), would be effective
in boosting private consumption and the economy as a whole.
Finally, since we found that the stability of household saving rates is a contributing
factor to the stagnation of private consumption in Japan, improving social safety nets
and improving access to consumer credit would also boost private consumption by
reducing precautionary saving (see Horioka and Yin (2010) and Horioka andTerada-Hagiwara (2012) for cross-country evidence on the impact of social safety nets
and consumer credit on household saving and consumption).
The author hopes that these policy measures will be adopted as soon as possible so thatprivate consumption as well as the Japanese economy as a whole can receive a boost,enabling it to extricate itself from two “lost decades” of stagnant growth and highunemployment.

9References
Horioka, Charles Yuji (2006), “The Causes of Japan’s ‘Lost Decade’: The Role ofHousehold Consumption,” Japan and the World Economy, vol. 18, no. 4 (December), pp.
378-400.
Horioka, Charles Yuji, and Terada-Hagiwara, Akiko (2012), “The Determinants andLong-term Projections of Saving Rates in Developing Asia,” Japan and the World

Economy, vol. 24, no. 2 (March), forthcoming.
Horioka, Charles Yuji, and Yin, Ting (2010), “Household Savings Rates and Social
Benefit Ratios: Country Comparisons,” in Masahiro Kawai and Gloria O. Pasadilla,
eds., Effects of Social Policy on Domestic Demand: Annual Conference 2009 (Tokyo,
Japan: Asian Development Bank Institute (ADBI)), pp. 63-75.
Data Sources(For data on consumption, GDP, and net household disposable income)
Organisation for Economic Cooperation and Development (OECD), National Accounts

of OECD Countries (Paris, France: Organisation for Economic Cooperation andDevelopment (OECD), 2010), 2010 edition.
(For data on unemployment rates (Annex Table 13), household saving rates (Annex
Table 23), and net household wealth to household income ratios (Annex Table 58)
Organisation for Economic Cooperation and Development (OECD), OECD Economic

Outlook (Paris, France: Organization for Economic Cooperation and Development(OECD)), no. 89 (May 2011).

10

Table 1: Growth Rates of GDP, Household Income, and Consumption
2002-2007
2007-2009
Net
HouseholdPrivatePrivateCountry
GDP
GDP
Disposable Consumption
Consumption
IncomeCanada
2.61
3.52
3.74
-0.98
1.67
U.S.
2.75
2.61
2.98
-1.35
-0.73
U.K.
2.68
1.14
2.44
-2.50
-1.38
France
2.00
1.94
2.09
-1.41
0.21
Japan
2.10
1.00
1.30
-3.76
-1.33
Italy
1.14
0.51
1.05
-3.29
-1.30
Germany
1.55
0.40
0.33
-1.91
0.27
Mean
2.12
1.59
1.99
-2.17
-0.37

Country
CanadaU.S.
U.K.
FranceJapan
Italy
Germany
Mean

2002
3.53
3.65
-0.05
13.66
5.09
11.36
10.06
6.76

Table 2: Household Saving Rates
2003
2004
2005
2006
2007
2.70
3.24
2.18
3.63
2.57
3.76
3.37
1.48
2.47
1.73
0.43
-1.70
-1.26
-2.95
-4.27
12.46
12.36
11.37
11.44
11.87
3.88
3.63
3.85
3.65
3.78
10.34
10.30
9.96
9.19
8.22
10.41
10.55
10.63
10.71
10.92
6.28
5.96
5.46
5.45
4.97

Change, 2002-07
-0.96
-1.93
-4.21
-1.79
-1.31
-3.14
0.87
-1.78

Table 3: Net Household Wealth to Household Income Ratios
Country
2002
2007
Change, 2002-07
Canada
5.127
5.485
0.358
U.S.
5.143
6.157
1.014
U.K.
7.156
9.008
1.852
France
5.713
8.063
2.350
Japan
7.194
7.353
0.159
Italy
7.475
8.570
1.095
Germany
5.336
6.276
0.940
Mean
6.163
7.273
1.110

11

Country
CanadaU.S.
U.K.
FranceJapan
Italy
Germany
Mean

Table 4: Unemployment Rates
2002
2007
Change, 2002-07
7.7
6.0
-1.7
5.8
4.6
-1.2
5.2
5.4
0.2
7.9
8.0
0.1
5.4
3.8
-1.6
8.7
6.1
-2.6
8.3
8.3
0.0
7.0
6.0
-1.0

12