ESRI Research Note No.77

On the decline in propensity to consume during the Abenomics
periodKeiko Murata, Masahiro Hori
May 2023

Economic and Social Research InstituteCabinet Office
Tokyo, JapanThe views expressed in “ESRI Discussion Papers” are those of the authors and not those of
the Economic and Social Research Institute, the Cabinet Office, or the Government of Japan.
(Contact us: https://form.cao.go.jp/esri/en_opinion-0002.html)

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

On the decline in propensity to consume during the Abenomics period †Keiko Murataa,c and Masahiro Horib,cRissho University
Hitotsubashi Universityabc

Economic and Social Research Institute, Cabinet Office

April 25, 2023

Abtract
During the Abenomics period, the Japanese government implemented policies aimed atpromoting economic growth and job creation through the "three arrows" of bold monetary easing,fiscal policy, and growth strategies. Although successful in creating jobs, the propensity toconsume declined in a manner inconsistent with the expectations derived from the life
cycle/permanent income hypothesis (LC/PIH) as the population aged. While the increase in the
consumption tax rate in April 2014 (from 5% to 8%) is often cited as the cause of the consumption
decline, this paper focuses on the types of income that increased and attempts to explain the
decline within the standard LC/PIH framework. Despite an increase in household disposable
income during the Abenomics period, most of it came from temporary sources, such as labor
income earned by women, the elderly, and non-regular workers. As a result, the ratio of permanent
income to current income decreased, leading to a decline in the propensity to consume. To achieve
domestic demand-led growth driven by consumption, policies are needed that generate an increasein household income perceived as permanent rather than temporary.

This work forms part of our micro-data based research project on household behavior in Japan at the
Economic and Social Research Institute, Cabinet Office. We are grateful to Kazuyasu Sakamoto forthoughtful comments on the earlier draft of this study. We also would like to thank the Statistics Bureau ofJapan for providing us with the microdata from the Family Income and Expenditure Survey (FIES) and theMinistry of Health, Labour and Welfare for the dataset from the Longitudinal Survey of Adults in the 21stCentury. The authors, Murata and Hori, were supported by JSPS KAKENHI Grant Numbers 20K01709
and 19K01715, respectively..

†1

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Keywords: Abenomics, propensity to consume, consumption tax, the Life cycle-Permanent
income hypothesis, aging

2

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

1. Introduction
The second Abe Administration, which started at the end of 2012, implemented economic policies
known as the 'three arrows': bold monetary easing policy, flexible fiscal policy and economic
structural reform. These policies initially led to an improvement in the Japanese economy, withincreased economic growth, rising stock prices, and a weaker yen due to the monetary easing
policy. The employment situation also improved and household disposable income increased.
However, while household consumption expenditure initially grew in 2013, it subsequently
declined for three consecutive years in real terms, indicating a limitation of Abenomics inboosting household consumption. The average household propensity to consume in Japan has
been on an upward trend for about 30 years under the ageing population, but has reversed andfallen since 2014 (Figure 1).
Figure 1. The average propensity to consume of households (SNA vs. FIES)

To investigate the decline in consumption propensity, Table 1a shows trends indisposable income and consumption. Between 1997 and 2014, the annual growth rate ofdisposable income was 0.1%, which increased to 0.7% between 2014 and 2018 1. Conversely, the1

As shown in Figure 1, until the mid-1990s there was a significant discrepancy in the consumption
trends of Japanese households between the Family Income and Expenditure Survey (FIES) and the3

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

annual growth rate of consumption declined from 0.8% to 0.1% over the same period. Meanwhile,
Japan's population has continued to age, with the ratio of the population aged 65 and over risingfrom 9.1% in the early 1980s to 17.4% in 2000 and 28% in 2018, making Japan one of thecountries with the highest elderly population ratios in the world. Table 1b shows that the increasein social security benefits contributed significantly to the increase in household disposable income
during 1997-2014 due to the aging of the population, while employer compensation remained
stagnant.
Table 1a. The average growth of household income and expenditures(%)

1997-20142014-2018

Expenditures

0.78

0.11

Disposable income

0.10

0.72

Table 1b. Disposable income growth and contribution of income sources
Disposable income
Contributions
Operating surplus and mixed income, net
Compensation of employees, receivable
Property income, net
Social benefits other than social transfers in kind, receivable
Current taxes on income, wealth, etc., payable
Net social contributions, payable
Other current transfers(%)

1997-2014 2014-2018
1.8
2.8
-0.7
1.2
-1.6
8.7
0.1
-5.7
-0.2

-1.6
6.9
0.4
0.1
-0.7
-2.3
0.1

Source: National Accounts.
Note: Table 1a shows the average annual growth during each period in real term. Table 1b
shows the real disposable income growth rate for each period and the contribution of each
item to that growth rate.

According to the life-cycle permanent income hypothesis (LC/PIH), an ageing
population leads to the proportion of retired households with a high propensity to consume,
resulting in an increase in Japan's consumption propensity (and a lower savings rate). Figure 2
displays the level and trends in average propensity to consume by age group of household headfrom the Family Income and Expenditure Survey (FIES) published by the Ministry of Internal
Affairs and Communications. As expected, the consumption propensity of elderly households

System of National Accounts (SNA), as highlighted by Ueda and Ohno (1993) and Iwamoto et al. (1995,
1996). This study focuses on the period after 1997, when this discrepancy disappeared and similar
consumption trends were observed in both the FIES and the SNA.

4

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"(households with a head aged 65 or older) is high and has remained above 1 since the 2000s. 2 In
contrast, the consumption propensities of the working-age population have remained below one,as shown in Figure 2. Furthermore, the figure also reveals that the consumption propensity ofhouseholds in each age group has changed over time. Specifically, from 1997 to 2014, that ofolder households was on the rise, while that of working-age households (up to their mid-50s) was
gradually declining. However, from 2014 to 2017, the trend began to decline for households of
all age groups: the trend reversed for older households, while it continued to fall for working-age
households.
Figure 2. The average propensity to consume: by age of household head

Given the observed facts presented above, this paper examines the factors behind thedecline in household consumption propensity since 2014 in Japan amid population aging, a trendthat appears to contradict standard LC/PIH presumptions. To explain this seemingly puzzlingsituation, this paper focuses on the breakdown of income growth and uses micro data on householdincome and consumption to show that income increases during the Abenomics period were skewed
toward types of income that are often viewed as temporary income increases. Through the results,
we also hope to shed light on the policies needed to stimulate household consumption andovercome economic stagnation in today's Japanese economy.
There are a number of previous studies that have examined the relationship between the2This reflects a pattern whereby household income declines significantly as a result of the head ofhousehold entering retirement around the age of 60 and turning no-occupation, whereas consumption levels
decline slowly after a peak around the early 50s of the age of the head of household (Murata 2019).

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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

aging of our economy and society and its impact on consumption and saving patterns. Until the
1980s, the explanation for Japan's high household saving rate was a topic of much attention (e.g.,
Hayashi, 1986; Horioka, 1990). Since then, the savings rate in Japan has been on a downward
trend. Horioka (2005) lists a number of factors that explain this downward trend and emphasizes
that the aging of the population, in particular, will continue to be a factor in lowering the savings
rate. Numerous studies have examined how population aging has contributed to the decline ofJapan's macro saving rate, resulting in an increase in the propensity to consume. Some notable
examples include Koga (2006) and Braun et al. (2009).
The above studies primarily focused on the impact of the growing share of elderly
households on reducing the household savings rate in Japan. Since the mid-1990s, data on retired
households have become available from the FIES, which revealed a negative and declining trend
in the savings rate of retired households. Horioka (2010) pointed to reductions in social security
benefits as a significant factor contributing to the declining savings rate of retired households,
while Iwaisako and Okada (2012) noted the non-linearity of the declining trend in the householdsavings rate and argued that the decline in the savings rate cannot be explained solely by the onetrack progression of ageing. Unayama and Ohno (2017) disaggregated household savings rates byage of head of household using dataset from the National Survey of Family Income andExpenditure (NSFIE) and found that only one-third of the decline in the household savings rate
was due to the increase in the share of older households. Unayama and Ohno (2018) noted thatdeclining property income due to the zero-interest rate policy and decreasing public pension
benefits as potential factors for the decline in the savings rate of elderly households.
Although these previous studies examined the relationship between population ageing
and savings rates, they have primarily focused on the effect of the population share of elderly anddeclining income among elderly, such as lower pension benefits. Moreover, these analyses werebased on data prior to the Abenomics period, and thus do not explain why the trend of increasing
propensity to consume reversed. In addition, the consumption tax rate increase in April 2014 (from
5 to 8%) is cited as a factor in the slump in consumption during the Abenomics period, but muchof the street debate is not based on sufficient empirical evidence. One of the few exceptions isCashin and Unayama (2016; 2021), but no clear conclusions to our question can be drawn, withthe former (2016) arguing that it pushed down permanent income and reduced consumption, while
the latter (2021) concludes that the decline in consumption due to the consumption tax hike is
temporary.
Based on this situation in previous studies, this study attempted to elucidate the causesof sluggish consumption during the Abenomics period by empirically analyzing the income
process and consumption behavior of Japanese households facing a declining birthrate, aging
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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

population, and declining growth potential, while setting the permanent income/life cycle
hypothesis (LC/PIH) of consumption as the basic framework for our analysis.
Arguments that attribute the stalling of consumption during the Abenomics period to theconsumption tax often ignore the fact that raising the consumption tax rate may also have theeffect of boosting permanent income through fiscal consolidation. 3 We focus on the expansionof disposable income achieved during the Abenomics period and consider its decomposition into
temporary income and permanent income based on the LC/PIH. During the income growth phaseof the Abenomics period, there was an increase in the income of women, the elderly, and parttime employment. However, this increase in income may not be considered as a permanent
income increase since it is less sustainable than the income increase of male household heads infull-time employment in Japan. In other words, the increase in income during the Abenomics
period was to a large extent realized as an increase in temporally income, and permanent income
did not increase as much as the current income. If consumption is determined according to the
LC/PIH, this increase in disposable income will be manifested as a decrease in the propensity toconsume.
Our hypothesis is generally supported by the observed data in published statistics, suchas the SNA and the Family Income and Expenditure Survey, and by the results of econometricanalysis using two microdata sets, namely, the Longitudinal Survey of Middle-aged and Older
Adults and the Family Income and Expenditure Survey. Specifically, the increase in income
during the Abenomics period occurred mainly in income categories with low persistence of
expansion based on past experience. Moreover, the increase in the share of temporary income(and the decrease in the share of permanent income) was accompanied by a decline in households'
propensity to consume. However, explaining the decline in the propensity to consume after 2014
with the decline in the share of permanent income considered in this study is limited. At least partof the slump in consumption may have been caused by the consumption tax hike.
The paper is organized as follows: In Section 2, we present two hypotheses that aim to
explain the decline in consumption during the Abenomics period. We also outline the empiricalstrategy we might use to test the relative importance of each hypothesis. Section 3 describes thedata used in this paper and identifies the components of household income that increased during
Abenomics. In Section 4, we examine the impact of increases or decreases in each income itemon household permanent and lifetime income, and show that the increase in household income
during Abenomics was mainly driven by temporary income. Section 5 examines changes in the3

If the consumption tax leads to fiscal consolidation, it may raise households’ permanent income byincreasing confidence in future funding of social security benefits and generating expectations of future
tax cuts.

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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

propensity to consume before and after Abenomics by household type and argues that the decline
in the propensity to consume during Abenomics was at least partly due to an increase in temporary
income. Finally, we draw conclusions in Section 6.
2. Hypotheses and strategies for empirical analysis
We consider the following two possible explanations or hypotheses about the reversal and decline
in the average consumption propensity of Japanese households after 2014, which had been risingagainst the backdrop of an aging population. The first hypothesis is that the increase in the
consumption tax rate (from 5 to 8%) in April 2014 may have suppressed consumption: a three
percentage point increase in the consumption tax rate may imply a three percent fall in the realvalue of future income, under the assumption that it has no effect on future nominal income, so it
is not surprising that a corresponding fall in consumption occurs after the consumption tax hike.
Indeed, in the debate on the macroeconomic environment in Japan, there are scattered argumentsthat the 2014 consumption tax hike caused Abenomics to stall (e.g. Takahashi, 2019; Fujii and
Morii, 2022; Morinaga, 2017).
However, this hypothesis is limited in that it does not take into account the possibility
that a consumption tax hike could have a positive effect on permanent income by bringing fiscal
stability and fostering expectations for future social security benefits and tax cuts. Given thesepotential consequences, it is difficult to imagine a decline in permanent income on the scale of aconsumption tax hike. Moreover, the 2014 consumption tax hike was decided in 2012 under the
Democratic Party of Japan and follows a predetermined (and expected) path. While there is apossibility that consumption will increase due to the intertemporal substitution effect and thendecrease in reaction to the increase, since it is an expected tax hike, the impact on permanent
income will be limited and the slump in consumption is likely to be only temporary. The actual
consumption tax rate increase during the Abenomics period resulted in a rush of consumption,
expanding by 8.1% year-on-year in the January-March 2014 period. However, this was followed
by a reactionary decline of 18.2% in the April-June period and a further decline in consumption
for three consecutive years until 2016 ( -0.9% in 2014, -0.3% in 2015 and -0.6% in 2016). Since
the weak consumption trend has continued since then, if the consumption tax source hypothesis
is to be adopted, it would be necessary to assume that permanent income decreased considerably
at the time of the tax rate increase in April 2014, which is not consistent with the fact that theincrease was anticipated much in advance.
Given that household consumption may be affected differently by age, it may be
worthwhile to examine the effects of a consumption tax increase on different age groups. An
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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

increase in the consumption tax rate would change the ratio of direct taxes to indirect taxes andgenerate an income transfer from the elderly to the working-age population. The benefits of astronger tax base resulting from a consumption tax increase, such as the improvement of the social
security infrastructure and future tax cuts, will be enjoyed mainly by the younger generation.
Therefore, the negative impact of the consumption tax hike is expected to fall heavily on older
households. If this is the case, a comparative analysis of working-age and elderly households
would be useful in examining the impact of the consumption tax hike on household consumption.
The second hypothesis focuses on sources of income in the household using the basic
framework of the standard LC/PIH. Although the decline in consumption propensity under anaging population appears to be inconsistent with the LC/PIH at first glance, the LC/PIH may
explain the slump in consumption during the Abenomics period if we consider the following. The
consumption propensity observed in the statistics is calculated by dividing consumption
expenditure in the current period by disposable income in the same period. If households follow
the standard LC/PIH, the impact on consumption will differ depending on whether the observed
income change is a permanent income change or a temporary income change. Let us consider thepropensity to consume in equation (1):
𝐶𝐶𝑡𝑡
𝑌𝑌𝑡𝑡

=

𝐶𝐶𝑡𝑡

𝑌𝑌𝑡𝑡 𝑃𝑃 +𝑌𝑌𝑡𝑡

𝑇𝑇 =β 𝑌𝑌𝑡𝑡 𝑃𝑃(1)

𝑌𝑌𝑡𝑡 𝑃𝑃 +𝑌𝑌𝑡𝑡 𝑇𝑇

where 𝑌𝑌𝑡𝑡 𝑃𝑃 represents permanent income and 𝑌𝑌𝑡𝑡 𝑇𝑇 represents temporary income. If temporary
income,𝑌𝑌𝑡𝑡 𝑇𝑇 , increases or decreases, consumption will remain unchanged and the propensity toconsume will decrease or increase in the current period, respectively. If permanent income, 𝑌𝑌𝑡𝑡 𝑃𝑃 ,increases (or decreases), the effect on the propensity to consume depends on the sign of 𝑌𝑌𝑡𝑡 𝑇𝑇 : it
the sign of 𝑌𝑌𝑡𝑡 𝑇𝑇 >0, the effect on the propensity to consume will be positive; if 𝑌𝑌𝑡𝑡 𝑇𝑇 <0, the effectis negative. 4

According to equation (1), we can attribute the upward trend in consumption propensity

among older households prior to 2014 to a decrease in temporary income relative to permanentor lifetime income. This approach also provides a consistent explanation for the decline in pension
benefits identified by Horioka (2010) and Unayama and Ohno (2018), by considering the
reduction in pensions as a decrease in temporary income 5. Moreover, the gradual downward trend
in consumption propensity observed among working-age households during the same period may

45

𝜕𝜕(𝐶𝐶𝑡𝑡 /𝑌𝑌𝑡𝑡 )∂𝑌𝑌𝑡𝑡 𝑃𝑃𝛽𝛽

= 𝑌𝑌 𝑃𝑃 +𝑌𝑌 𝑇𝑇 −𝑡𝑡

𝑡𝑡

β 𝑌𝑌𝑡𝑡 𝑃𝑃

𝑇𝑇 2

�𝑌𝑌𝑡𝑡 𝑃𝑃 +𝑌𝑌𝑡𝑡 �=

𝛽𝛽𝑌𝑌𝑡𝑡 𝑇𝑇

�𝑌𝑌𝑡𝑡 𝑃𝑃 +𝑌𝑌𝑡𝑡 𝑇𝑇 �

2

Income declines in old age are considered to be temporary income declines because they typicallyconform to a pattern where the rate of current income decline is greater than the rate of lifetime income
decline.

9

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

be interpreted as a result of a larger decline in permanent or lifetime income than in temporary
income, due to the flattening of the wage-age profile in the labor market. Similarly, the decline inpropensity to consume for all age groups after 2014 can be understood by interpreting the increasein household income as an increase in temporary income. If the increase in household disposable
income achieved during the Abenomics period was concentrated in the type of income perceived
by households as temporary, then consumption propensity could decline even under an ageing
population, consistent with the LC/PIH.
The main challenge in empirically testing the second hypothesis is how to identify
whether changes in income of each household are permanent or temporary. To address thischallenge, we focus on three key features related to how households perceive changes in theirincome. The first is the difference in employment status (i.e., regular vs. non-regular
employment 6). Under Japanese employment practices, regular employees are entitled to senioritybased wages and a stable increase in income, and have a high probability of continuing to work
under dismissal restrictions. On the other hand, non-regular employees' wage does not increase
much, but they often leave their jobs. Therefore, it is not as easy to predict their future income
based on their current income as it is for regular employees. The increase in income for regular
employees is strongly correlated with future income and can therefore be easily recognized as anincrease in permanent income, whereas a large proportion of the increase in income for nonregular workers will have to be recognized as an increase in temporary income.
The second is the gender-based differences. Typically, in Japan, husbands are the main
breadwinners in the household, while wives' labor often serves as a buffer against shocks that
occur in the home. Wives are usually the ones who have to make the decision to leave their jobs
when they are needed in the household due to marriage, childbirth or caring for parents. Given
this fact, an increase in the husband's income can be recognized as a permanent increase inhousehold income, while an increase in the wife's income is more likely to be considered atemporary increase. Based on this, we can predict that one-worker households with a male headof household will have higher consumption propensity than two-worker households, as the shareof permanent income in total income is higher in one-worker households where the husband is
the only breadwinner.
The third is the age-based differences. Under Japanese employment practices, where
lifetime employment and seniority wage systems are applied, changes in earnings from work
during the young age has a permanent effect on working income during subsequent periods of6

Regular employees are, in principle, full-time employees with no fixed term of employment, while nonregular employees are those who are not in regular employment, such as part-time workers, temporary
workers and day laborers.

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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

employment. Conversely, income changes in older individuals have a smaller effect on
lifetime/permanent income than in the case of younger individuals, since they foresee the shorter
period in the future. This suggests that an increase in income during old age has a greater impact
on temporary income than permanent income, leading to a decrease in consumption propensity.
3. Household income growth during the Abenomics
3.1 Data
This study uses microdata obtained from two statistics: the Family Income and Expenditure
Survey (FIES) issued by the Ministry of Internal Affairs and Communications and theLongitudinal Survey of Adults in the 21st Century（LSA）issued by the Ministry of Health, Labourand Welfare.
The FIES is a monthly survey of income and expenditure for approximately 8,000
households nationwide for a continuous period of six months. One-sixth of the households
surveyed are replaced by new households each month. While the FIES provides comprehensive
data on household income and expenditures, the survey period for each household is limited to
six months, so annual panels and the like cannot be constructed to allow analysis of long-term
economic behaviors.
The LSA covers men and women within the age range of 20 to 34 years old at the endof October 2002. It covers approximately 30,000 people (and their spouses) and has been
conducted annually from 2002 to 2015, collecting information including job status, type of
employment, income 7, expenditures, education, marital status, childbirth and health status. As aresult, it is possible to construct long-term panels suitable for analyzing economic behavior overa longer period of time.
3.2 Contribution of household income growth by household head and spouse
To investigate how household income growth in Abenomics period was brought about from anaspect of permanent or temporary income, as discussed in Section 2, we focus on three key
attributes, i.e., age, gender and employment status. First, we analyze the respective contributionsof the head of household and spouse to changes in household income. Specifically, we calculated
the average increase in household disposable income and the contribution by the head of

7 The question on income changed from income solely from work to income including other income suchas interest income, starting from the sixth survey. Still, as other income was small and the series obtained
from respondents showed few discontinuous changes, we used the income from these questions as a single
series for our analysis.

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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

household and spouse for each age group of the head of household (in 10-year increments) for theperiod 1997 to 2014 and the period 2014 to 2017. Household disposable income declined acrossall age groups from 1997 to 2014 (Table 2, top panel). The husband's earnings from work
decreased across all age groups, while the wife's earnings from work increased across all age
groups, with a higher growth rate observed in the younger age groups.
Table 2. Household disposable income and expenditures by age of household head(%)
Aged 25-34

Aged 35-44

Aged 45-54

Aged 55-64

Aged 65-74

Average
Average
Average
Average
Average
Contri‐Contri‐Contri‐Contri‐Contri‐annualannualannualannualannualbution tobution tobution tobution tobution to
growth
growth
growth
growth
growthincomeincomeincomeincomeincome
rate
rate
rate
rate
rate

All
Average
Contri‐annualbution to
growthincomerate

1997-2014
Disposable income
Working income of the head
Working income of spouse of the head
OthersExpenditures
2014-2017
Disposable income
Working income of the head
Working income of spouse of the head
OthersExpenditures

-0.3
-0.7
1.6
-0.2
1.1
0.1
3.6
-1.0

-0.6
0.2
0.1

0.1
0.7
0.4

-0.6
-0.7
1.6
-0.7
0.0
-0.4
0.9
-2.5

-0.7
0.2
-0.1

-0.4
0.2
0.3

-0.8
-0.7
0.2
-0.9
1.0
0.5
4.3
-0.7

-0.7
0.0
-0.1

0.5
0.7
-0.3

-1.1
-0.8
1.1
-0.3
1.3
2.7
6.8
-1.2

-0.6
0.1
-0.6

2.3
1.1
-2.1

-1.6
-2.5
0.0
-0.2
2.0
13.0
15.2
-0.3

-0.4
0.0
-1.2

2.2
0.8
-1.1

-1.2
-1.6
0.2
-0.6
1.1
0.6
4.1
-0.6

-1.3
0.0
0.1

0.2
1.0
-0.2

Notes: Calculations are based on data collected from workers' and no-occupation households with a male head who responded over a six-month
period in the FIES. Income and expenditures are deflated using the consumer price index.

From 2014 to 2017, household disposable income increased across all age groups (Table
2, bottom panel). Husband's working income increased mainly in the older age groups (aged 5564 and aged 65-74), but were weaker in the working age group (aged 54 and below). In contrast,
wife’s working income continued to increase in all age groups. Notably, for households whose
head was aged 54 and below, the contribution of the wife's working income to the increase inhousehold income was greater than that of the husband's working income.
Table 2 shows that household disposable income has turned from declining to increasing
for all age groups since 2014, and that this increase has been driven by increases in the incomesof women (wives) and the elderly. Next, we will look at the increase in disposable income of
women (wives), distinguishing between those in regular employment and those in non-regular
employment. In Japan, the ratio of regular employees to total employees is about two-thirds, butthere is a large gender gap: for men, this ratio reaches about 80%, while for women it is less thanhalf (according to the Labor Force Survey). As discussed above, since non-regular workers havehigher turnover and lower wage seniority than regular workers, the impact of current income
increases on lifetime earnings is expected to be larger for the former (regular workers) than forthe latter (non-regular workers) for the same age group.
12

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Unfortunately, the FIES does not provide information on whether a person is in regularor non-regular employment, but it does provide information on occupational categories, such asprivate sector employees, public sector employees, non-office laborers, temporary laborers 8. We
initially considered using this information to compare the distribution of wives' earnings (the sixmonth total covered by the survey) for each household according to these occupational categories.
As shown in Figure 3, the distribution of wives' working income, regardless of occupational
category, is concentrated below around 1 million yen or less per annum, indicating a tendency tocontrol their own income within the so-called '1.06 million' or '1.3 million' barrier.
(million yen)

.6
.4
0

.2

kdensity y_wife.81

Figure 3. Distribution of wives’ wage income by occupation

0

5

2012-2013

non-office laborers
private sector employees

15

10

temporary laborers
public sector employees

Note: The six-month total of each household's wife's wage income was calculated from the
FIES and multiplied by two to obtain an estimate of the yearly figures.

Under Japan's tax and social security systems, a wife can receive various tax and social security
exemptions and deductions if her income is small and her husband income is high 9. For example,
a wife is exempt from income tax if her annual income is less than 1.03 million yen. In addition,
depending on the conditions of employment, she becomes eligible for her own social insurance if
her annual income is JPY 1.06 million or more, and is obliged to join her own social insurance if
her income is JPY 1.3 million, resulting in her premium burden. Other requirements could alsochange with her annual income of 1.5 or 2 million yen. Therefore, we abandoned the use of"occupational categories" and attempted to divide wives' labor income into two groups: those withannual labor income of at least 2 million yen (referred to as 'regular' employee wives) and thosewith less (referred to as ' non-regular' employee or without occupation wives). 10
8

Beginning in 2018, a question asking whether the respondent is a regular employee or not was added.
This can be adapted to a husband if he earns less than his wife.
10 2 million corresponds to 1,000 yen per hour multiplied by 40 hours for 50 weeks; analysis was also
913

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Table 3 compares changes in household disposable income and expenditures by theemployment status of the spouse of household head ('regular' vs. 'non-regular'/no-occupation) andthe age of the household head. Household disposable income by age of household head decreased
from 1997 to 2014, regardless of the wife's employment status ('regular' vs. 'non-regular'/nooccupation). By income earner, while the husband's income decreased during the 1997-2014
period, the wife's income decreased for wives with regular employment status and, conversely,
increased for wives with non-regular or no-occupation employment status.
Table 3. Household disposable income and expenditures, by employment status of the wife(%)
Aged 25-34

Aged 35-44

Aged 45-54

Aged 55-64

Aged 65-74

Average
Average
Average
Average
Average
Contri‐Contri‐Contri‐Contri‐Contri‐annualannualannualannualannualbution tobution tobution tobution tobution to
growth
growth
growth
growth
growthincomeincomeincomeincomeincome
rate
rate
rate
rate
rate

All
Averag Contri‐
e annual bution
growthtorateincomeEmployment status of the wife of the head
A. 'Regular' employee
1997-2014
Disposable income
Working income of the head
Working income of spouse of the head
OthersExpenditures
2014-2017
Disposable income
Working income of the head
Working income of spouse of the head
OthersExpenditures

-0.6
-0.6
-0.4

-0.4
-0.2
0.1

-0.3
1.2
1.5
0.9
0.8

-1.1
-0.9
-0.9

-0.6
-0.4
-0.1

-1.2

0.9
0.4
-0.2

-0.6
-0.8
-1.2
-1.9

-0.6
-0.5
-0.1

-0.3
0.0
-0.2

-0.8

-0.5
-0.6
0.5

-1.3
-1.2
-1.6
-3.2

-1.0
-1.2
-0.3

-0.7
-0.1
-0.2

-0.4

-0.8
-0.8
0.4

0.8
3.3
0.5
0.2

-1.9
-4.5
-2.3

-0.7
-1.4
0.1

-1.1

1.8
0.3
-1.3

2.7
22.1
1.6
-2.6

-0.9
-0.9
-0.4

-0.6
-0.2
-0.1

-0.8

3.1
0.9
-1.4

0.2
0.1
-0.1
-0.8

0.1
0.2
-0.1

B. 'Non-regular' employee or without occupation
1997-2014
Disposable income
Working income of the head
Working income of spouse of the head
OthersExpenditures
2014-2017
Disposable income
Working income of the head
Working income of spouse of the head
OthersExpenditures

-0.4
-0.7
4.1

-0.7
0.2
0.1

-0.3
0.7
-0.2
0.6
-1.6

-0.7
-0.7
2.5

-0.8
0.1
0.0

-0.7

-0.2
0.0
0.8

0.0
-0.3
2.6
-2.7

-0.8
-0.7
1.0

-0.8
0.1
-0.1

-0.9

-0.3
0.2
0.2

0.9
1.0
2.1
-0.3

-1.2
-0.7
2.1

-0.6
0.1
-0.7

-0.3

1.1
0.2
-0.3

0.6
2.4
4.5
-1.7

-1.6
-2.4
2.3

-0.4
0.0
-1.2

-0.2

2.2
0.3
-2.0

1.5
12.4
10.5
-0.3

-1.3
-1.7
1.3

-1.5
0.1
0.1

-0.6

2.2
0.3
-1.0

0.8
0.5
2.9
-0.7

0.1
0.5
0.2

Notes: See notes to Table 2. 'Regular' employee wives are those with annual labor income of at least 2 million yen and 'non-regular' employee wives arethose earn less than 2 million yen.

From 2014 to 2017, the household disposable income of households with wives being non-regular
workers or without occupation started to increase for all age groups. This is because wives'incomes increased for all age groups, while husbands' incomes decreased for the younger age
groups (25-34 and 35-44). On the other hand, changes in the household income of regular working
wives are not uniform across age groups. Households headed by males aged 34-44 and 45-54

carried out broken down by 1.3 million yen, but this did not change the conclusions of the results obtainedin Table 3.

14

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

show a decline, due to a fall in income for both the husband and the wife.
To summarize the findings from Tables 2 and 3, the decline in household income for all
age groups during 1997-2014 was largely driven by a decline in the husband's income. In contrast,
the increase in household income seen from 2014 onwards was largely due to an increase in wife's
income as a non-regular employed worker, including those who converted to work, as well as anincrease in male elderly income. These findings are consistent with the changes in employment
rates by gender and age observed over the same period. Specifically, the employment rate of
women in Japan has consistently increased since 1997, primarily in non-regular employment.
Although the male employment rate has remained high, there has been a slight downward trend,
particularly among younger age groups. For those aged 60 and over, a clear increase was observed
from around 2002, attributable to the extension of the retirement age and other factors.
4. Effects of various income changes on permanent/lifetime income
In the previous section, we confirmed that the increase in household disposable income during
the Abenomics period was mainly driven by an increase in the labor income of wives, the elderly,
as well as that of non-regular workers. In this section, we will examines whether the impact ofobserved increases or decreases in current income on permanent income (persistence of incomechanges) varies by income type, i.e. gendear, age, and employment status using annual panel dataon individual earnings from the Longitudinal Survey of Adults in the 21st Century (LSA), andwill derive implications of the facts found in the previous section in terms of the LC/PIH.
4.1 Persistence of income changes by gender, age, and empoloyment status
To see the persistence of income changes by income type, we specifically considered thefollowing model, with α as the parameter expressing the persistence of income fluctuations:
𝛼𝛼

ℎ
ℎ
1−𝛼𝛼
𝑌𝑌𝑖𝑖,𝑡𝑡= 𝑌𝑌𝑖𝑖,𝑡𝑡−1
𝑍𝑍𝑖𝑖,𝑡𝑡
�1 + 𝜀𝜀𝑖𝑖,𝑡𝑡 �（2）ℎwhere 𝑌𝑌𝑖𝑖,𝑡𝑡
represents the income in year t of individual i belonging to income type h, 𝑍𝑍𝑖𝑖,𝑡𝑡

represents a certain combination of other attributes affecting individual’s current income, and 𝜀𝜀𝑖𝑖,𝑡𝑡

is the disturbance term. By log-linearizing each variable in equation (2) and taking the firstdifference, we estimate equation (3) to compare the value of (α-1) by income type:ℎℎ∆𝑙𝑙𝑙𝑙𝑌𝑌𝑖𝑖,𝑡𝑡= (𝛼𝛼 − 1)𝑙𝑙𝑙𝑙𝑌𝑌𝑖𝑖,𝑡𝑡−𝑠𝑠+ γ𝑋𝑋𝑖𝑖,𝑡𝑡 + 𝜀𝜀𝑖𝑖,𝑡𝑡 .

（3）
15

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

We consider gender, employment status (regular vs. non-regular), and age as income types, andtest how the impact of observed changes on permanent income varies among those income types 11.
The parameter α in Equation (3) represents the persistence of income changes, with higher values
indicating that income changes have a greater impact on permanent income. We anticipate that
income changes for men, regular employment, and younger age groups will have a greater impact
on permanent income than women, non-regular employment, and older age groups, respectively.
To test income persistence at 1-year and 5-year intervals, we tried s=1 or s=5 for s in the model. 12
The results of estimating equation (3) with Median regression are reported in Table 4s.
Table 4a compares persistence by gender and employment type between 1-year persistence (fors=1) and 5-year persistence (for s=5). The findings are generally consistent with our expectations.
The persistence of income changes after one year is higher for men than for women, and forregular employment workers than for non-regular employment workers, indicated by the smaller
absolute values of α-1 (or higher values of α). These patterns remain when the analysis isconducted with a five-year interval, although the estimated αs become smaller for five-year
persistence, as expected.
In Table 4b, we restrict the results to the 5-year case and run median regressions bydividing the sample into two categories by age group and further dividing the sample period into
two periods: 5 years from 2002 and 5 years from 2007, to examine possible age differences inpersistence and changes in persistence over years. Even when the sample is split in this way, theresults remain stable, confirming that regular workers are more persistent than non-regular
workers and that, for regular workers, male working income are more persistent than female
working income. Looking at the results by age, persistence is weaker for the sample in their 20s
than for the sample in their early 30s, a result that differs from our expectation that income growthat younger ages has a greater impact on permanent income. However, due to the limitations of the
LCA data, the age group comparisons here are between young adults in their 20s and early 30s,
which may be because the comparison is not between young adults and older adults, as assumed
in the theoretical discussion. On the other hand, the change in persistence by time period showsthat persistence has increased more in the more recent sample (five years since 2007).

11

𝑋𝑋𝑖𝑖,𝑡𝑡 includes education dummies, age dummies and year dummies. The LSA asked respondents thequestion of income during the previous year in specific amounts until the 12th survey. However, from the13th survey, the question changed to one in which respondents had to select one of 18 ranges given.
Therefore, in the following analysis, we have restricted our use of income up to the 12th survey, which
asked about income earned in the previous year until 2011. We assume that the empirical results obtained
have not changed significantly since 2012.
12 Income type h is allowed to shift over the course of s years, and the income type h for each individual isestimated using the type at time t-s.

16

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Table 4. Income persistence by gender, employment status, and age
Table 4-a. Persistence: One-year persistence vs. Five-year persistence
One-year difference
obs.

α-1

Regular-employment

53,818Male

30,901

Female22,917

Nonregular-employment

21,256

Male

1,679

Female19,577-0.122 ***(0.002)-0.097 ***(0.002)-0.217 ***(0.003)-0.196 ***(0.003)-0.269 ***(0.013)-0.224 ***(0.003)Five-year difference
Discrepancies of α-1
MaleRegularFemale nonregular
0.074
0.120

obs.

α-1

25,899-0.257 ***(0.005)-0.230 ***(0.006)-0.443 ***(0.008)-0.548 ***(0.009)-0.714 ***(0.034)-0.608 ***(0.010)0.172

14,6180.007

11,2819,215-0.045603
8,612

Discrepancy of α-1
MaleRegularFemale nonregular
0.291
0.213

0.484
0.165

-0.106

Notes: Median regressions. The dependent variables is the one- or five-year differences in the natural logarithm ofincome. Standard errors of the coefficients are shown in parentheses.*** indicates significance at the 1 percent
level.

Table 4-b.

Five-year persistence by age group and time period classification
Age20-29

Age30-35
Discrepancies of α-1

t = 2002
Regular-employment

obs.

α-1

1,492

-0.528 ***(0.021)-0.561 ***(0.033)-0.695 ***(0.029)-0.775 ***(0.038)-0.986 ***(0.073)-0.794 ***(0.042)

Male

544

Female948

Nonregular-employment

719

Male

62

Female657

t = 2007
Regular-employment

890

Male

305

Female585

Nonregular-employment

339

Male

22

Female317-0.234 ***(0.029)-0.311 ***(0.060)-0.388 ***(0.035)-0.535 ***(0.055)-1.550 ***(0.198)-0.632 ***(0.056)

MaleFemale

0.134

Regularnonregular

Discrepancies of α-1
obs.

α-1

0.247

1,619

0.425

1,049

0.099

570

-0.242 ***(0.019)-0.253 ***(0.025)-0.357 ***(0.035)-0.469 ***(0.038)-0.551 ***(0.172)-0.524 ***(0.040)531-0.192

31
500

0.077

0.301

1,636

1.239

964

0.244

672
558

-0.91840518-0.184 ***(0.016)-0.140 ***(0.025)-0.316 ***(0.025)-0.394 ***(0.028)-0.312 ***(0.204)-0.433 ***(0.033)

MaleFemale

Regularnonregular
0.227

0.104

0.298
0.167

-0.027

0.210
0.176

0.172
0.117

0.121

Notes: Median regressions. The dependent variables is the five-year differences in the natural logarithm ofincome. Standard errors of the coefficients are shown in parentheses.*** indicates significance at the 1 percent
level.

17

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

4.2 Persistence of observed employment status
While the previous subsection examined income persistence by gender, age, and employment
status, this subsection examines employment status persistence by gender and age. In Japan,
husbands are typically the primary breadwinners and maintain their employment as regular
employees, while women often work in a more flexible role or move in and out of the labor market
or changing employment status, functioning as a buffer to manage life events such as childbirthor changes in their husband's work location. To investigate this, we estimated the probability ofremaining in regular employment over five years for men and women by using a simple probit
regression. The fitted values obtained from the estimated probit models are reported in Figure 5.
Figure 5. Probability of regular employment persistence by age and gender.6.7

Pr(seiki_musyoku)
.9
.8

1

Predictive margins with 95% CIs

20-24

25-29

agegrp
Male

30-34

35-39

FemaleNotes: Predictive margins estimated with a probit model using data from the 21st Century
Longitudinal Survey of Adults. The model estimates the probability that a person who was inregular employment this year will still be in regular employment five years later. Explanatory
variables include age, age squared, education, and year dummies.

The results show that the probability of remaining in regular employment is more than
90% for men, regardless of age group, while for women it is about 60% in their 20s and 80% intheir 30s, indicating that men consistently outpace women. This means that for women, even if
they are currently working as regular employees, the likelihood that they will continue to do soin the future must be discounted more than in the case of men. Under these circumstances, theincrease in women's working income will be less likely to be perceived as a permanent income
increase (compared to men).
The findings in Section 3 indicate that household disposable income declined across all
age groups from 1997 to 2014, largely due to a drop in husbands' income. However, from 2014
onwards, household disposable income increased across all age groups, with significant
18

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

contributions from wives and the elderly. Furthermore, our analysis in this Section 4 finds thatthe persistence of income of men and those in regular employment is higher than that of womenand those in non-regular employment, respectively. The reason of the former is partly explainedby the higher persistence of employment status for men than for women.
Taken together, it can be inferred that the increase in disposable income of Japanesehouseholds during the Abenomics period depended on an increase in the type of income thatwould be perceived as temporary income increases, and that the increase in permanent income
was smaller than the increase in current income observed in the period.
5. Testing hypotheses to explain the decline in propensity to consume
Given the finding in the previous section that the ratio of permanent/lifetime income to current
income are likely to have declined during the Abenomics period, this section considers whether
this decline can account for the decline in Japan's average propensity to consume after 2014.
5.1 Changes in average propensity to consume by household type
Using microdata from the FIES, we explore the validity of two alternative hypotheses to explain
the decline in consumption during the Abenomics period. The first hypothesis (consumption tax
hypothesis), which is widely circulated, attributes the weak consumption mainly to the economic
setback caused by the consumption tax hike (from 5 to 8 percent) implemented in 2014. The
second hypothesis (temporary income increase hypothesis), which is original to this paper,
considers the slump in consumption to be the result of an increase in temporary income (or adecrease in the ratio of permanent/lifetime income to current income) during the Abenomics
period.
To test the plausibility of each of the two hypotheses, we would identify the types ofhouseholds that experienced a substantial decline in the average propensity to consume during
the Abenomics period. This is because if the average propensity to consume had declined
according to our second hypothesis, the decline in the average propensity to consume would be
more pronounced for households that were facing a temporary income increases. On the other
hand, under the first hypothesis, the decline in consumption propensity may be more pronounced
among the elderly households, who are less likely to benefit from fiscal consolidation throughhigher consumption taxes 13, than among the working-age households.
It is conceivable that the consumption tax hike could have positive effects through fiscal consolidation
if people form somewhat forward-looking expectations. However, this positive effect will be enjoyed by
future generations, and the extent to which elderly households can benefit from it is thought to be small
13

19

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

To capture changes in consumption propensity by household type over time, we firstestimated the regression equation in specification (4) below, which can be used to calculate
average consumption propensity by household type, period, and age group.
𝐶𝐶𝑖𝑖𝑖𝑖= 𝛽𝛽1 + ∑9𝑘𝑘=2 𝛽𝛽𝑘𝑘 𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻(𝑘𝑘)𝑖𝑖𝑖𝑖 + γ𝑋𝑋𝑖𝑖𝑖𝑖 + 𝑒𝑒𝑖𝑖𝑖𝑖
𝑌𝑌𝑖𝑖𝑖𝑖（4）where 𝐶𝐶𝑖𝑖𝑖𝑖 /𝑌𝑌𝑖𝑖𝑖𝑖 represents is the propensity to consume for household i, defined as household i's
total 6-month consumption divided by household i's total 6-month disposable income.

𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻(𝑘𝑘)𝑖𝑖𝑖𝑖 (k=2,3,...,9) are household type dummies constructed to distinguish between

the nine types of household. In classifying the households, we first classified each household headand spouse into three types: white-collar, blue-collar, and no-worker (without occupation) for thehead; and regular worker (annual income of more than 2 million), non-regular worker (annual
income of less than 2 million), and no-worker (without occupation) for the spouse. 14 The
combination of the head and spouse types comprises a total of nine household types. To estimate
the average propensity to consume for each of these nine household types, eight dummy variables
𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻𝐻(𝑘𝑘)𝑖𝑖𝑖𝑖 (k=2,3,...,9) were created with the combination of white-collar head and spousewith no occupation as a baseline. 15 𝑋𝑋𝑖𝑖𝑖𝑖 represents vector of other control variables such as thenumber of household members, a homeownership dummy, dummies for presence or absence ofchildren by age (that of junior high school students, high school students, and that of children
under five years old), an urban region dummy, and year and monthly dummies. We estimated thisregression equation for a total of 15 runs, three time periods (1997-1999, 2012-2014, and 20162018) and five age groups (25-34, 35-44, 45-54, 55-64, 65-74).
Table 5 reports estimated 𝛽𝛽𝑘𝑘 s and constant (𝛽𝛽1 ) terms from our 15 median regressions.

By calculating the fitted value of the regression estimated in this way, the average propensity toconsume can be obtained for each household type, household head age group, and time period.

The average propensity to consume for the baseline type household (or households with a whitecollar husband and a full-time housewife) can be roughly captured by the coefficient on theconstant term (β1), which increases from 0.57 to about 0.98 as age increases.

(compared to the working-age population).
14
As noted in the previous sections, the FIES does not tell us the classification of whether a worker is aregular or non-regular employee. Therefore, for the head of household (husband), we use white-collar or
blue-collar as an alternative classification. For the spouse, on the other hand, we have decided to use theclassification based on income level introduced in section 3.2, because we believe that the income basedclassification makes more sense for the spouse than the white-collar/blue-collar classification.
15
In Japan, a household with a full-time homemaker has been considered the standard household.

20

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Table 5. Median regression results of the propencity to consume
Aged
Aged Aged
Aged
25-34
25-34 25-34
35-44
19972012- 201619971999
2014
2018
1999
Employment status
Husband
Wife
White-collar 'Regular' employee-0.106 *** -0.119 *** -0.091 *** -0.113 ***'Non-regular' employee -0.014 -0.025 -0.005 -0.006
Blue-collar'Regular' employee-0.078 *** -0.068 *** -0.016 -0.079 ***'Non-regular' employee 0.030 * 0.001
0.025
0.016
No-occupation
0.050 *** 0.047 *** 0.049 ** 0.062 ***No occupation 'Regular' employee
0.054 0.180
0.432 -0.082'Non-regular' employee 0.120 0.630 *** 0.063
0.468 ***
No-occupation
0.468 *** 0.346 *** 0.438 *** 0.436 ***0.583 *** 0.608 *** 0.607 *** 0.566 ***
const

Aged
35-44
20122014-0.103 ***-0.029 ***-0.081 ***-0.044 ***0.033 **
0.037
0.390 ***
0.202 ***
0.712 ***

Aged
45-54
19971999-0.112 ***-0.028 **-0.079 ***-0.0110.033 *
0.171 **
0.473 ***
0.935 ***
0.665 ***

Aged
45-54
20122014-0.109 ***-0.044 ***-0.070 ***-0.0130.022
0.094
0.373 ***
1.805 ***
0.672 ***

Aged
45-54
20162018

Aged
35-44
20162018-0.118 *** -0.101 ***-0.027 *** -0.020 *-0.065 *** -0.066 ***
0.010
0.025
0.067 *** 0.067 ***
0.059
0.335
0.923 *** 2.207 ***0.438 *** 1.127 ***0.604 *** 0.576 ***

Aged
55-64
19971999-0.113 ***-0.044 *-0.115 ***-0.074 ***
0.028
0.057
0.160 ***
0.379 ***
0.663 ***

Aged
55-64
20122014-0.200 ***-0.107 ***-0.178 ***-0.106 ***0.037-0.0270.302 ***
0.682 ***
0.784 ***

Aged
55-64
20162018

Aged
65-74
19971999-0.189 *** -0.061-0.084 *** -0.066-0.211 *** -0.091-0.072 ** -0.078
0.035
0.015
0.051 -0.050
0.289 *** 0.080 *
0.742 *** 0.239 ***0.740 *** 0.859 ***

Aged
65-74
20122014

Aged
65-74
20162018-0.150-0.181
0.007-0.106-0.114-0.208 *-0.120 * -0.120 **0.022-0.031-0.021-0.1020.134 *** 0.116 **0.339 *** 0.363 ***0.976 *** 0.893 ***Notes: The coefficients for the constant term refer to households in the reference group, which is defined as those with a white-collar husband and wife without occupation. Dummy of the household head age (every 2
years), a dummy for home ownership, the number of household members, dummies for child/children (aged 0-5, 6-15 and 16-19) , a dummy for farming households, year dummies, monthly dummies and a city dummy
are included in the regressions. *, **, *** indicate significance at the 10, 5, and 1 percent level, respectively.

21

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

The estimated coefficients for the household type dummies in Table 5 allow us to see
the extent to which other types of households have different average consumption propensities
compared to the baseline type household. The first thing that is clear from the table is the fact that,regardless of the age of the household head or observation year, the propensity to consume islowest when the husband is working, especially as a white-collar worker, and conversely, it ishighest when the husband has no occupation. This finding is consistent with the pattern that canbe derived from the LC/PIH. Next, controlling for the effect of husband's employment status, theeffect of the wife's employment clearly confirms that the higher the wife's income earning level,
the lower her propensity to consume. This is the expected pattern under the hypothesis of thispaper that the wife's income is likely to be perceived as a temporary income for the household.
Moreover, looking at the results for the pre-retirement period (ages 55-64), it can be confirmedthat income in this period, whether in regular or non-regular employment, reduces the propensity
to consume significantly. This is the pattern expected when income growth in the elderly period
is perceived as temporary income for households.
We can observe changes in average propensity to consume for each household typeacross time periods by calculating the differences in the propensity to consume over threeestimation periods (1997-1999, 2012-2014, and 2016-2018), which are obtained as predictedvalues from the estimated model (4) reported in Table 5. Figure 6 first focuses on older households,
showing changes in average propensity to consume over time separately for households with ahead aged 55-64 (Figure 6-i) and for households with a head aged 65-74 (Figure 6-ii).
Figure 6. Projected change in propensity to consume by household type (for elderly households)i)
1.35

Aged 55-64

ii) Aged 65-74
[a]

1.25
1.15

1.60

1.35

1.40

1.25

1.20

1.15

1.05

1.00

1.05

0.95

0.80

0.95

0.85
0.75
0.65

[b]

[c]
[d]
[e]
[f]

0.55

1997-1999
2012-20142016-2018[a] Hus.: no-occupation, Wife: no-occupation, (right axis)[b] Hus.: no-occupation, Wife: 'non-regular' employees[c] Hus.: no-occupation, Wife: 'regular' employees[d] Hus.: white collar, Wife: no-occupation[e] Hus.: white collar, Wife: 'non-regular' employees[f] Hus.:white collar, Wife: 'regular' employees

0.60

0.85

0.40

0.75

0.20

0.65

0.00

0.55

[a]

[b]

[c]

1997-1999

2012-20142016-2018[a] Hus.: no-occupation, Wife: no-occupation[b] Hus.: no-occupation, Wife: 'non-regular' employees[c] Hus.: no-occupation, Wife: 'regular' employees

Note: The predicted values were obtained using the estimated parameters from Table 5. For the explanatory variables
used in the estimation, i.e. household head age dummies, owner-occupied dummies, etc., the mean values for each group and period
were employed.

22

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Households with a head aged 55-64 are a mixture of working and retired households, so the figure
shows both cases where the husband is working in a white-collar job and where he is without
occupation. On the other hand, since the majority of households with a head aged 65-74 arealready retired, only the case where the husband is not working is shown. For each husband's
employment status, three different average consumption propensities are presented for the threedifferent wives' employment statuses (or income level categories).
We see that from 1997-1999 to 2012-2014, the consumption propensity of elderly
households continued to increase for all types of households, but after 2014 (or from 2012-2014
to 2016-2018), a reversal decline occurred for most types of households. For households with ahead aged 55-64, the consumption propensity declined after 2014 when wives were employed,
except when husbands were retired and wives worked as 'regular' employees. On the other hand,in households where neither the husband nor the wife works, the trend of rising consumption
propensity disappeared, but the decline in consumption propensity did not occur even after 2014.
These findings for elderly households are consistent with our second hypothesis, which predicts
that spousal employment status affects the propensity to consume by influencing the ratio of
permanent/lifetime income to current income, while they appear to be inconsistent with the first
hypothesis, which expects substantial negative effects of the consumption tax increase on retired
elderly.
The reversal of the trend in the consumption propensity of elderly households in the
mid-2010s may be due in part to changes in the level of pension benefits during this period. In
Figure 7, it can be read that the kernel distribution of social security benefits for elderly
households continued to shift to the left (or decrease) from 1997 to the mid-2010s, hitting bottom
after the mid-2010s. The pattern of consumption propensity among elderly households is in linewith this change in social security benefits, suggesting that factors other than the consumption tax
rate hike may have played a role in the reversal of consumption propensity among elderly
households.

.2
.1
0

kdensity ssbnft.3.4

Figure 7. Social security benefits for elderly households

0

2
1997

4
6
8
Social security benefits, Age 65-74
2002

2007

2012

10
2017

Note.
The six-month total of social security
benefits for each household, whose head wasaged 65-74, was calculated from the FIES
and multiplied by two to obtain an estimateof the yearly figures.

23

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Figure 8 depicts the change in average propensity to consume over time for workingage households aged 54 or younger. Since there are few unemployed households in the workingage group, we draw figures only on households where the husband is a white-collar employee. It
can be consistently confirmed that the higher the wife's income, the lower the average propensity
to consume. Looking at changes over time, unlike older households, the consumption propensityof working-age households has been declining before 2014, and the rate of decline has rather
slowed since 2014, except for middle-aged (45-54 years old) households where the wife is a nonregular employee (Figure 8, i) - iii)). This slower rate of decline in the propensity to consume
among younger households might be considered consistent with the idea that the negative impactof a consumption tax rate hike would be smaller for younger households than for older households.
On the other hand, the negative effect on the economy of raising the consumption tax rate would
be offset (at least in part) by the positive effect of expectations of fiscal consolidation, suggestingthat the effect would be smaller than what would be expected from the magnitude of changes inthe statutory tax rate. 16
Figure 8. Projected change in propensity to consume by household type (for working-age households)i) Aged 25-34

ii) Aged 35-44

iii) Aged 45-54

0.75

0.75

0.75

0.70

0.70

0.70

0.65

0.65

0.65

[d]
[d]
0.60

[d]
[e]

0.55

0.50

[f]

0.45

1997-1999

2012-2014[d] Hus.: white collar, Wife: no-occupation[e] Hus.: white collar, Wife: 'non-regular' employees[f] Hus.:white collar, Wife: 'regular' employees

2016-2018

0.60

[e]

0.55

[e]

0.60

[f]

0.55

[f]

0.50

0.45

1997-1999

2012-2014[d] Hus.: white collar, Wife: no-occupation[e] Hus.: white collar, Wife: 'non-regular' employees[f] Hus.:white collar, Wife: 'regular' employees

2016-2018

0.50

0.45

1997-1999

2012-20142016-2018[d] Hus.: white collar, Wife: no-occupation[e] Hus.: white collar, Wife: 'non-regular' employees[f] Hus.:white collar, Wife: 'regular' employees

Note: The predicted values were obtained using the estimated parameters from Table 5. For the explanatory
variables used in the estimation, i.e. household head age dummies, owner-occupied dummies, etc., the mean values for eachgroup and period were employed.

16

Although not depicted in Figures 6 and 8, the share of households with low consumption propensities
may have increased during the Abenomics period due to increased employment of women and the elderly.
Consequently, the decline in overall macro consumption propensity during this period could be attributed
not only to the decrease in consumption propensity by household type but also to a shift in householdcomposition towards those with lower consumption propensities.

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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

5.2

Propensity to consume vs. ratio of permanent income to current income

The findings in the previous section suggest that the decline in the propensity to consume during
the Abenomics period may not have been caused solely by the consumption tax hike, as often
touted, but rather by the fact that income growth during Abenomics was skewed toward temporary
income. However, to test this hypothesis in a more rigorous sense, we need micro-panel data overa period of time that can simultaneously track changes in savings rates and income composition
items for the same household. The FIES household micro data used in the previous section,although panel data for households, are monthly data and limited to a six-month period, which
unfortunately is not suitable for the present purpose. We will therefore leave that issue for future
analysis using annual medium- and long-term panels, and here we will use semi-aggregate datato confirm the relationship between average propensity to consume and ratio between permanent
income and current income, which is the basis of our hypothesis.
As introduced in equation (1) of Section 2, under the LC/PIH, the propensity to consume
is determined by the following equation, and a proportional relationship is expected between the
average propensity to consume and the ratio of permanent/lifetime income to current income.
𝐶𝐶𝑖𝑖𝑖𝑖

𝑌𝑌𝑖𝑖𝑖𝑖𝑃𝑃𝐶𝐶

β 𝑌𝑌 𝑃𝑃

𝑌𝑌 𝑃𝑃

𝑖𝑖𝑖𝑖
𝑖𝑖𝑖𝑖
= 𝑌𝑌 𝑃𝑃 +𝑌𝑌= 𝛽𝛽 𝑌𝑌𝑖𝑖𝑖𝑖𝑇𝑇 =𝑌𝑌 𝑃𝑃 +𝑌𝑌 𝑇𝑇
𝑖𝑖𝑖𝑖

𝑖𝑖𝑖𝑖

𝑖𝑖𝑖𝑖

𝑖𝑖𝑖𝑖

𝑖𝑖𝑖𝑖

𝑌𝑌𝑖𝑖𝑖𝑖 /𝑌𝑌𝑖𝑖𝑖𝑖 is the permanent income to current income ratio of household i in year t. Since 𝑌𝑌𝑖𝑖𝑖𝑖 𝑃𝑃 ,the permanent/lifetime income of household i at time t, is not directly observable, we assume thatthe ratio can be approximated by the ratio of regular working income, excluding overtime

payments and bonuses, of the primary income earner (or the male head) to household income. We
focus only on the young and middle-aged group (household head age 25-44) since the male head's
earnings from work are more likely to be strongly correlated with permanent income in this age
group in Japan as suggested by Figure 5 and discussed in section 2. Bonuses or overtime salaries
are excluded from working income of the head to reduce possible effects caused by business cycle
fluctuations.
Here, we compared the time-series developments of the ratio of regular working incomeof the male head to household income, our proxy variable forpropensity to consume (𝐶𝐶𝑖𝑖𝑖𝑖 ⁄ 𝑌𝑌𝑖𝑖𝑖𝑖 ) by age group (Figure 9).

𝑌𝑌𝑖𝑖𝑖𝑖 𝑃𝑃 /𝑌𝑌𝑖𝑖𝑖𝑖 , and the average

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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

Figure 9. Consumption propensity vs. ratio of male head's working income to household income

Notes: The average propensity to consume is calculated as the mean of household propensity to consume in each age group.
Similarly, Pi/Y is the mean of Pi/Y of household in each age group.

We observed that the average propensity to consume tends to decline in parallel withthe decline in our proxy variable for the permanent income to current income ratio, implying that
consumption is largely determined by permanent/lifetime income as predicted by the LC/PIH.
Additionally, the fact that our proxy variable has continued to decline since 2014 onwards is ofparticular interest. Thus, if our variable is a good proxy for permanent income, the observed
patterns are generally consistent with the idea that a decline in the share of permanent/lifetime
income to current income has contributed to the decline in average propensity to consume since2014.
6. Conclusions.
This study aimed to understand the decline in consumption propensity since 2014 in Japan, whichappears to be inconsistent with the prediction of PI/LCH, given the rapidly aging population.
While the increase in the consumption tax rate from 5% to 8% in April 2014 is often cited as acause of the slump in consumption during the Abenomics period, it is difficult to determine if it
is sufficient, as the consumption tax could also have a positive impact on ensuring fiscal healthand generating expectations for future tax cuts and social security benefits.
As an alternative hypothesis to account for the decline in the propensity to consume
during the Abenomics period instead of a consumption tax hike, we examined the possibility thatthe increase in income was biased toward temporary income in the context of the LC/PIH of
consumption. Under the assumption that consumption is determined according to the permanent
income/lifecycle hypothesis, an increase in temporary income is expected to reduce the ratio of
permanent/lifetime income to current income and thus appear as a decline in the propensity toconsume.
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ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

To test these hypotheses, this paper conducted empirical analyses using aggregate datafrom national accounts and other sources, as well as micro data from the Family Income andExpenditure Survey and the Longitudinal Survey of Adults in the 21st Century. Empiricalanalyses find that:(i) The increase in Japanese household income during the Abenomics period was largely due
to the increase in income of spouses, the elderly, and non-regular workers, who are not the
primary income earners in the household. (Section 3)(ii)

Income increases for women, the elderly, and part-time or non-regular workers were lesssustainable than income increases for the husbands of full-time workers, who are theprimary income earners in households, and in that sense, income increases during
Abenomics was in the form of temporary income. (Section 4)(iii) The decline in households' propensity to consume during the Abenomics occurred insynchrony with the decline in the ratio of permanent/lifetime income to current income,which resulted from the increase in temporary income during the period. In this sense,
factors other than the consumption tax rate hike are likely to have had some effect on the
decline in consumption after 2014.
These findings suggest that a substantial part of the decline in the propensity to consume
during the Abenomics period can be attributed to structural factors beyond the effects ofconsumption tax suppression. Moreover, the study suggests that in order to increase consumption(i.e., reverse the decline in the propensity to consume), it is crucial to increase household income
in a way that is perceived as a permanent rather than temporary increase in income. Achieving
this requires a growth strategy, which has been advocated as the third arrow in Abenomics, as
opposed to stimulus measures that provide only temporary income boosts. If potential growth
rises, it will increase the number of workers in regular employment and raise workers' base wages,
which will be perceived by households as an increase in permanent income.
In addition, the Japanese labor market has low liquidity, and it is difficult for regular
workers to return to work under the same conditions after leaving their jobs, making it difficult
for women, the elderly, and non-regular workers to perceive their own income increases aspermanent income increases. Increasing the liquidity of the labor market and creating a systemthat allows individuals to easily return to work after leaving the labor market if they wish to do
so will be essential to solving the problem.

27

ESRI Research Note No.77"On the decline in propensity to consume during the Abenomics period"

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