Discussion Paper No. 661

THE CAUSES OF JAPAN’S ‘LOST DECADE’:
THE ROLE OF HOUSEHOLD CONSUMPTIONCharles Yuji Horioka

June 2006

The Institute of Social and Economic Research
Osaka University
6-1 Mihogaoka, Ibaraki, Osaka 567-0047, Japan

THE CAUSES OF JAPAN’S ‘LOST DECADE’: THE ROLE OF HOUSEHOLDCONSUMPTIONCharles Yuji Horioka
Institute of Social and Economic Research, Osaka University, 6-1, Mihogaoka, Ibaraki,
Osaka 567-0047, Japan,
Telephone: 81-(0)6-6879-8586, 8574, Facsimile: 81-(0)6-6878-2766
Email: horioka@iser.osaka-u.ac.jp andNational Bureau of Economic Research, Inc., Cambridge, Massachusetts, U.S.A.
November 29, 2005; revised February 18, 2006
Abstract: In this paper, I analyze the causes of the prolonged slowdown of the Japanese
economy in the 1990s and find that the stagnation of investment, especially private fixed
investment, was the primary culprit. I then investigate the causes of the stagnation ofhousehold consumption during the 1990s and find that the stagnation of household
disposable income, the decline in household wealth, and increased uncertainty about the
future are among the contributing factors. Finally, I consider whether demand side factors
or supply side factors were more important as causes of the prolonged slowdown of theJapanese economy in the 1990s and conclude that the former (especially misguided
government policies) were probably more important.
Journal of Economic Literature classification numbers: D12, E21, E32, O47, and O53
Key words: Japan; Japanese Economy; Lost Decade; Stagnation; Slowdown; Recession;
Deflation; Economic Fluctuations; Business Fluctuations; Business Cycles; Growth;
Economic Growth; Gross Domestic Product; GDP; Investment; Capital Formation;
Household; Consumption; Household Consumption; Structure of Consumption; Saving;
Household Saving; Precautionary Saving; Uncertainty; Future Prospects; Demand Side
Factors; Supply Side Factors
Forthcoming in Japan and the World Economy, vol.18, no. 4 (December 2006).

1. Introduction
Japan’s economy has been stagnant more or less continuously for more than adecade (Japan’s so-called “Lost Decade”), and Japan’s growth rate during this period has
been the lowest among the major industrialized countries of the world.

During the

1995-2002 period, for example, the annualized growth rate of Japan’s real gross domestic
product (GDP) averaged only 1.2%, which is lower than all of the other G7
countries—Canada (3.4%), the United States (3.2%), the United Kingdom (2.7%), France(2.3%), Italy (1.8%), and Germany (1.4%)--as well as the Euro area average (2.2%) andless than half of all of the other larger OECD countries—Korea (5.3%), Australia (3.8%),
Spain (3.3%), the Netherlands (2.9%), and Mexico (2.6%)--as well as the OECD-wide
average (2.7%).
Figure 1 shows trends over time in the annual growth rate of real GDP andhousehold consumption during the 1980-2003 period and, as can be seen from this figure,GDP growth was relatively high during the 1980-1991 period (the so-called bubble period)and much lower during the 1991-2003 period (the so-called post-bubble period). This isverified by the first column of Table 1, which shows that GDP growth averaged a full
3.89% during the 1980-91 period but only 1.14% (less than a third of the 1980-1991 level)
during the 1991-2003 period.
What caused the sharp decline in GDP growth, and what caused it to persist for
more than a decade?

In this paper, I attempt to shed light on the causes of the prolonged

slowdown of the Japanese economy in the 1990s by analyzing demand side data on thesources of growth of GDP and the sources of growth of household consumption in
conjunction with similar data on the immediately preceding 1980-1991 period. By sodoing, I attempt to assess whether, and to what extent, the stagnation of household
consumption is responsible for the prolonged slowdown of the Japanese economy. I thenspeculate about the causes of the stagnation of household consumption, and after devoting1the bulk of the paper to demand side factors, I turn finally to a consideration of the relative
importance of demand side and supply side factors as causes of the prolonged slowdown of
the Japanese economy.
This paper is organized as follows: section 2 considers the sources of growth ofGDP, section 3 considers the sources of growth of household consumption, section 4
considers possible causes of the stagnation of household consumption, section 5 considers
whetherdemand side or supply side factors contributed more to the prolonged slowdownof the Japanese economy, and section 6 is a brief concluding section.
To preview the main findings of this paper, I find that the stagnation of investment,
especially private fixed investment, was the major culprit of the prolonged slowdown of theJapanese economy in the 1990s and that the stagnation of spending on clothing andfootwear, transport, and to a lesser extent, miscellaneous goods and services, education, andfood and non-alcoholic beverages were the main culprits of the stagnation of household
consumption. By contrast, I find that the main factors holding up GDP growth werehousehold consumption, government consumption, and net exports and that the main
factors holding up household consumption growth were spending on health,communication, and to a lesser extent, restaurants and hotels and housing-related
expenditures. I also find that the stagnation of household consumption was due primarily
to the stagnation of household disposable income, the decline in household wealth (which
in turn was due primarily to the collapse of land and equity prices), and to a lesser extent,
increased uncertainty about the future (especially about old age in general and public
old-age pensions in particular), the deterioration of future prospects, etc.

Finally, I

consider whether demand side factors or supply side factors were more important as causesof the prolonged slowdown of the Japanese economy in the 1990s and conclude that theformer (especially misguided government policies) were probably more important.

22. An Analysis of the Sources of GDP Growth
In this section, I analyze the sources of GDP growth during the 1991-2003 period
and consider the extent to which the stagnation of household consumption was responsible
for the prolonged slowdown of the Japanese economy.
For the purposes of this analysis, I decompose gross domestic product (GDP) into
the following six components: actual final consumption of households (hereafter referred toas “household consumption”), government actual final consumption (“government
consumption”), private gross domestic fixed capital formation (“private fixed investment”),
public gross domestic fixed capital formation (“government fixed investment”), changes ininventories (“inventory investment”), and net exports of goods and services (“net exports”).
Household consumption differs from the standard concept in that it includes “socialtransfers in kind,” which consist of “social benefits in kind” (health insurance and nursing
care insurance benefits, which are used to finance the consumption of medical and nursing
care services by households) and “transfers of individual non-market goods and services”
from the government (such as subsidies for textbooks, public day care centers, etc.) andfrom private non-profit institutions serving households (such as subsidies for private
nursery schools, art museums, zoos, etc.).

Since both types of consumption are ultimately

for the benefit of households, it seems preferable to include them in household
consumption.１

Conversely, government consumption differs from the standard concept inthat it excludes social transfers in kind from the government to households.
Looking first at Figure 1, it can be seen from this figure that the growth rate ofhousehold consumption exceeded that of GDP in eight out of the twelve years during the
1991-2003 period. This suggests that household consumption did not act as a drag on theeconomy and rather that it prevented it from stagnating further.
The first two columns of Table 1 show the average annualized real growth rate
(hereafter referred to as “growth rate”) of GDP and the various components thereof during
3the 1980-91 and 1991-2003 periods. Looking first at the 1991-2003 period, the growthrate of GDP during this period was a mere 1.14%, whereas the growth rate of household
consumption was 1.56%. Thus, the growth rate of household consumption was somewhat
higher than that of GDP during the 1991-2003 period, which provides further corroborationthat household consumption did not act as a drag on the economy and in fact raised rather
than lowering the growth rate of GDP.２ Note, however, that the growth rate of household
consumption was not very high in absolute terms, that it was not nearly as high as thegrowth rate of certain other components of GDP such as net exports (6.39%) andgovernment consumption (3.22%), and that it ranked only third among the six components
of GDP.
What did act as a drag on the economy was investment--private and government
fixed investment as well as inventory investment, all of which showed slower growth than
GDP and in fact all of which showed negative growth during the 1991-2003 period: -0.24%
in the case of government fixed investment, -0.59% in the case of private fixed investment,
and very negative but not calculable in the case of inventory investment (because it was
negative in the terminal year).

A breakdown of private fixed investment shows thatprivate housing (dwelling) investment declined especially sharply (-2.48% as opposed to-0.14% in the case of plant and equipment investment), which suggests that sluggish private
housing investment might have been the primary culprit of the prolonged slowdown of theJapanese economy.
The third and fourth columns of Table 1 show the contribution to real GDP growthof each component thereof during the 1980-91 and 1991-2003 periods. Looking first at
the 1991-2003 period, household consumption made by far the largest contribution to real
GDP growth (85.40%). Government consumption made the second largest contribution(18.64%), and net exports made the third largest contribution (13.07%).

Some haveclaimed that strong export growth prevented the prolonged slowdown of the Japanese4economy from becoming even worse, but the contribution of net exports to real GDP
growth was relatively modest and it ranked only third.

The contributions of government

fixed investment (-1.26%), inventory investment (-4.35%), and private fixed investment(-11.49%) to real GDP growth were all negative, with the contribution of private fixed
investment being especially large in absolute magnitude. A breakdown of private fixed
investment shows that private housing investment was responsible for 81% of the negative
contribution of private fixed investment, suggesting again that it was the primary culprit of
the prolonged slowdown of the Japanese economy.
Some of the foregoing results concerning the growth rate of each component of
GDP and its contribution to real GDP growth are seemingly at odds with one other, but thedifferences can be explained by the share of each component in total GDP. For example,
household consumption made by far the largest contribution to real GDP growth eventhough it ranks only third with respect to growth rates simply because it is by far the largest
component of GDP with a share of more than 60% (see Table 2).

Conversely, thecontribution of net exports to real GDP growth was only third highest even though its
growth rate was by far the highest of any component of GDP simply because its share of
GDP is so small (3% or less, which puts it in fifth place among the six components ofGDP).
Next, I compare the sources of growth of the Japanese economy during the
1991-2003 period to those during the immediately preceding 1980-91 period. Looking
first at thegrowth rates of GDP and its components (compare the first and second

columns of Table 1), thegrowth rate of GDP during the 1991-2003 period was less than athird of what it was during the 1980-91 period (1.14% vs. 3.89%).

Householdconsumption showed the third highest growth rate of any component of GDP in both time
periods, but its growth rate was much lower in absolute terms during the 1991-2003 period
than it was during the 1980-91 period (1.56% vs. 3.59%). Even so, the growth rate of5household consumption exceeded that of GDP during the 1991-2003 period whereas it fellslightly short of that of GDP during the 1980-91 period.
If we compare the growth rates of the remaining components of GDP during thetwo time periods, the growth rate of net exports was much higher during the 1991-2003
period than it was during the 1980-91 period, and its rank was also much higher (first vs.
sixth).

Similarly, the growth rate of government consumption was only slightly lower

during the 1991-2003 period than it was during the 1980-91 period, and its rank was quite abit higher (second vs. fourth). By contrast, the growth rates of the investment-related
components of GDP (private fixed investment, government fixed investment, and inventory
investment) were all negative during the 1991-2003 period even though they were all
positive and inventory investment and private fixed investment ranked first and second,
respectively, during the 1980-91 period.
Turning next to a comparison of the contribution to real GDP growth of eachcomponent of GDP during the two time periods (compare the third and fourth columns ofTable 1), and looking first at household consumption, household consumption made by far
the largest contribution to real GDP growth during both time periods, but its contribution
was much larger during the 1991-2003 period than during the 1980-1991 period (85.40% vs.
57.24%) even though its growth rate was much lower than during the 1980-91 period andeven though its growth rate was so low in absolute terms because the growth rate of GDP
was even lower and because its share of GDP is by far the largest of any component ofGDP.
Government consumption and net exports made the second and third largest
contributions to real GDP growth during the 1991-2003 period even though theircontributions were only the third and sixth largest during the 1980-91 period, and themagnitudes of their contributions were also much larger during the 1991-2003 period thanduring the 1980-91 period.

By contrast, private fixed investment, government fixed6

investment, and inventory investment (especially private fixed investment) all madenegative contributions to real GDP growth during the 1991-2003 period even though theircontributions were positive during the 1980-91 period. The most striking case is that ofprivate fixed investment, whose contribution to real GDP growth was a full 34.09% during
the 1980-91 period but -11.49% during the 1991-2003 period, a decline of 45.58 percentage
points!

This indicates how volatile investment has been and suggests that investment(especially private fixed investment) may have been the main culprit of the slowdown of
the Japanese economy after 1991.
To examine this contention more directly, I next analyze the change in the averageannualized real growth rate of each component of GDP and the contribution of eachcomponent of GDP to the decline in real GDP growth between 1980-91 and 1991-2003.
Looking first at the change in growth rates (see the first column of Table 3), the growth rateof consumption declined by 2.03 percentage points between 1980-91 and 1991-2003, whichis considerably less than the decline in the growth rate of GDP (2.75 percentage points).
This confirms my earlier contention that household consumption did not act as a drag on
the economy.
Looking at the change in the growth rates of the other components of GDP, net
exports were the only component showing an increase in its growth rate (by 5.60
percentage points). The other components of GDP all showed declines in their growth
rates: 0.32 percentage points in the case of government consumption, 1.09 percentage
points in the case of government fixed investment, 6.70 percentage points in the case ofprivate fixed investment, and not calculable but large in the case of inventory investment.
A closer look at private fixed investment shows that the decline in the growth rate of private
plant and equipment investment (-7.59%) was much larger in absolute magnitude than the
decline in the growth rate of private housing investment (-4.92%), which appears tocontradict my earlier contention that the decline in private housing investment was the7primary cause of the slowdown of the Japanese economy in the 1990s.
Turning finally to the contribution of each component of GDP to the decline in real
GDP growth between 1980-91 and 1991-2003 (see the second column of Table 3), private
fixed investment made by far the largest contribution to the decline in real GDP growth(67.91%), followed by household consumption in second place (36.34%), inventory
investment in third place (5.22%), and government fixed investment in fourth place(3.84%).

The contributions of the remaining components of GDP (government

consumption and net exports) to the decline in real GDP growth were negative, meaningthat they held up real GDP growth and prevented it from falling further. A closer look at
private fixed investment shows that the contribution of private plant and equipment
investment to the decline in real GDP growth (54.86%) was much larger than thecontribution of private housing investment (13.05%), which casts further doubt on myearlier contention that the decline in private housing investment was the primary cause of
the prolonged slowdown of the Japanese economy in the 1990s.
These results confirm that private fixed investment and, to a lesser extent,
government fixed investment and inventory investment were the main culprits of the
prolonged slowdown of the Japanese economy in the 1990s, that net exports andgovernment consumption prevented the slowdown from becoming even worse, and thathousehold consumption was somewhere in the middle, contributing the most to real GDP
growth but, at the same time, contributing substantially to the decline in real GDP growth.
A detailed analysis of the reasons why private fixed investment was the main
culprit of the prolonged slowdown of the Japanese economy during the 1990s is beyond thescope of this paper, but previous studies have attributed it to a combination of factors
including (1) the sharp curtailment of bank lending (the so-called “credit crunch”) and theincrease in systemic risk, both of which were caused by the financial crisis and theproliferation of non-performing loans, which in turn were caused by the collapse of the8

bubble economy of the late 1980s and the subsequent decline in asset (land and equity)
prices, (2) a further curtailment of bank lending due to the untimely introduction of theBasel guidelines for capital adequacy in 1993, (3) the inadequacy of government actions
aimed at resolving the financial crisis and the non-performing loan problem, (4) the
inadequacy of aggregate demand due in large part to the inadequacy of monetary and fiscal
stimuli, (5) increased uncertainty about future prospects for the Japanese economy as wellas increased volatility, and (6) massive overinvestment in corporate plant and equipment
during the bubble years (due in large part to overly expansionary monetary policy), which
induced firms to sharply curtail fixed investment during the post-bubble years as a way of
reducing excess capacity in the corporate sector (see section 5 for more details).
Saito (2000) does a similar analysis for the earlier postwar period and finds thathousehold consumption made the largest contribution to real GDP growth during the earlier
postwar period as well but that its contribution (and also the contribution of government
consumption) were not as large as they were after 1991.

Thus, the role played byhousehold (and government) consumption during the post-1991 period was large not only
in absolute terms but also relative to the earlier postwar period.

3. An Analysis of the Sources of Consumption Growth
I turn next to an analysis of the sources of growth of household consumption. I
break household consumption down into twelve components using the same classification
scheme used in the National Accounts of Japan. In this section, I use the same concept ofhousehold consumption used in the previous section except that I exclude “transfers ofindividual non-market goods and services” from the government and from private
non-profit institutions serving households to households because a detailed breakdown
thereof by purpose is not available for all years. However, I do include “social benefits inkind” in household consumption and, in particular, I include them in the “health”
9component of household consumption because they consist of health insurance and nursing
care insurance benefits,

which are used to finance the consumption of medical andnursing care services by households.３
The first two columns of Table 4 show data on the average annualized real growthrate of each component of household consumption during the 1980-91 and 1991-2003
periods, and looking first at the 1991-2003 period, “communication” (11.69%) showed by
far the most rapid growth during this period (because of the rapid diffusion of cell phones),and “health” (3.66%), “recreation and culture” (2.99%), “housing, electricity, gas and watersupply” (2.19%), and “restaurants and hotels” (1.88%) also grew faster than overall
consumption (1.54%), thereby boosting it.

By contrast, “furnishings, household

equipment and household services” (1.12%), “miscellaneous goods and services” (0.66%),“transport” (0.53%), “food and non-alcoholic beverages” (-0.02%), “alcoholic beverages
and tobacco” (-0.17%), “education” (-1.15%), and “clothing and footwear” (-2.73%) grewless slowly than overall consumption, thereby serving as a drag thereon.
The third and fourth columns of Table 4 show the contribution of each componentof household consumption to real household consumption growth during the 1980-91 and1991-2003 periods, respectively, and looking first at the 1991-2003 period, “housing,electricity, gas and water supply” made the largest contribution (30.11%) because it showed
the fourth highest growth rate and because it has by far the largest share (see Table 5), while“health” made the second largest contribution (26.80%) because it showed the second
highest growth rate and because it has one of the largest shares.

The relatively large

contribution of housing-related expenditures was due primarily to the increase in the
imputed rent on owner-occupied housing (imputed services of owner-occupied dwellings).
Imputed rent grew at a rate of 2.34% (vs. 2.19% in the case of housing-related expenditures
as a whole), its share of housing-related expenditures is about 70%, and its contribution toreal household consumption growth was 22.65% (vs. 30.11% in the case of housing-related
10expenditures as a whole).

Imputed rent on owner-occupied housing is likely to be

mismeasured because it is not a market transaction but rather is imputed using various
assumptions, and I doubt that it grew as rapidly as the official figures suggest during aperiod when land prices were declining steadily. Thus, the fact that imputed rent onowner-occupied housing was the single largest source of growth of household consumption
during the 1991-2003 period, according to the official figures, suggests that there isconsiderable uncertainty about exactly how much consumption grew during this period.
“Recreation and culture” made the third largest contribution (21.76%) because its
growth rate was the third highest and because its share is the third or fourth largest, while“communication” made the fourth largest contribution (15.32%) even though its share is
one of the smallest because its growth rate was by far the highest. “Restaurants andhotels” made the fifth largest contribution (7.36%), followed by “miscellaneous goods andservices,” “furnishings, household equipment and household services,” and “transport.”
By contrast. “food and non-alcoholic beverages,” “alcoholic beverages and tobacco,”“education,” and “clothing” all made negative contributions, with the negative contributionof clothing being the largest in absolute magnitude (-9.83%).
Next, I compare the sources of growth of household consumption during the
1991-2003 period to those during the immediately preceding 1980-91 period. Looking
first at the growth rates of each component of household consumption in the two periods(compare the first two columns in Table 4), the growth rate of household consumption as awhole declined from 3.61% in 1980-91 to 1.54% in 1991-2003.

“Communication”

showed the highest growth rate during both periods, but its growth rate increased sharply.
“Health” increased from sixth to second, “housing, electricity, gas and water supply” fromseventh to fourth, and “restaurants and hotels” from ninth to fifth, even though the growth
rates of the first two of these components declined. By contrast, “furnishings, household
equipment and household services” declined from third to sixth, “miscellaneous goods and11

services” from third to seventh, “transport” from fifth to eighth, and “clothing andfootwear” from eighth to twelfth (last place), with the growth rates of these components
declining sharply. Finally, “recreation and culture,” “food and non-alcoholic beverages,”“alcoholic beverages and tobacco,” and “education” showed little change in their ranks but
their growth rates declined considerably.
Looking next at the contribution of each component to the growth of realhousehold consumption in the two periods (compare the third and fourth columns of Table4), the contribution of “housing, electricity, gas and water supply” increased sharply,
allowing it to maintain its number one ranking, the contribution of “recreation and culture”
increased somewhat but its rank fell from second to third nonetheless, and the contributionof “health” more than doubled, allowing it to increase its rank from fifth to second.
“Communication” and “restaurants and hotels” showed sharp increases in their ranks aswell as their contributions, whereas “miscellaneous goods and services,” “furnishings,
household equipment and household services,” “transport,” “food and non-alcoholic
beverages,” and “clothing and footwear” showed declines in their ranks as well as theircontributions. Finally, “alcoholic beverages and tobacco” and “education” showed littlechange in either their ranks or their contributions.
I next analyze the change in the average annualized real growth rate of eachcomponent of household consumption and the contribution of each component to thedecline in the real growth of household consumption between 1980-91 and 1991-2003.
Looking first at the change in growth rates (see the first column of Table 6), the growth rateof household consumption as a whole declined by 2.06 percentage points between 1980-91
and 1991-2003, and the change in the growth rates of each component should be comparedagainst this standard. The only components of household consumption showing increases
in their growth rates between the two time periods were “communication” (an increase of
3.77 percentage points) and “restaurants and hotels” (an increase of 0.10 percentage points),
12

but “health,” “food and non-alcoholic beverages,” “alcoholic beverages and tobacco,” and“housing, electricity, gas and water supply” showed smaller declines in their growth rates(in absolute magnitude) thanoverall consumption, thereby propping up consumption,

whereas “education,” “furnishings, household equipment and household services,”“clothing and footwear,” “recreation and culture,” “transport,” and “miscellaneous goods
and services” showed sharper declines in their growth rates (in absolute magnitude) thanoverall consumption, thereby contributing to its decline.
Turning finally to the contribution of each component to the decline in the real
growth of household consumption between the two periods (see the second column of Table6), “transport” contributed the most to the decline in real household consumption growth(31.18%), followed by “miscellaneous goods and services,” “clothing and footwear,” “foodand non-alcoholic beverages,” “furnishings, household equipment and household services,”“recreation and culture,” “housing, electricity, gas and water supply,” “education,” and“alcoholic beverages and tobacco.”“Restaurants and hotels,” “health,” and“communication” made negative contributions to the decline in household consumption(i.e., propped up real growth in household consumption), with the contributions of“communication” and “health” being especially large in absolute magnitude.
To sum up, the relative importance of the various components of household
consumption differs depending on which criterion is used to rank them, but the componentsthat rank relatively high with respect to virtually all criteria include “communication” and“health” and, to a lesser extent, “restaurants and hotels” and “housing, electricity, gas andwater supply,” while the components that rank relatively low with respect to virtually all
criteria include “clothing and footwear,” “transport,” and, to a lesser extent, “miscellaneous
goods and services,” “education.,” and “food and non-alcoholic beverages.”With the exception of housing-related expenditures, necessities (such as “clothing
and footwear,” and “food and non-alcoholic beverages”) were the most stagnant and13contributed the most to the stagnation of household consumption during the 1991-2003
period, whereas with the exception of “transport” and “education,” luxuries (such as“health,” “recreation and culture,” “communication,” and “restaurants and hotels”) showed
the strongest growth and contributed the most to holding up household consumption during
this period. Thus, somewhat surprisingly, consumption patterns became more affluent
during the 1991-2003 period despite the stagnation of household income and wealth,suggesting that the prolonged slowdown of the Japanese economy was not severe enough to
impoverish Japanese households. However, it could be that the increasing affluence ofconsumption patterns is attributable to an increase in income and wealth disparities among
Japanese households, and if this explanation is the correct one, it implies that the poor
became even poorer.４
Changes in relative prices seem to be able to explain some of the observed patterns
in household consumption.

For example, the average annualized inflation rates of“communication” and “recreation and culture” were negative and large in absolutemagnitude (-3.78% and -3.39%, respectively), and thus, assuming that the demand for thesecomponents is relatively price-elastic, the negative inflation rates can help explain why the
consumption of these components increased relatively rapidly. By contrast, the inflation
rate of “education” was positive and large in absolute magnitude (2.34%), and thus,
assuming that the demand for education is relatively price-elastic, the high inflation rate
thereof can help explain why the consumption thereof declined absolutely.
Another possible influence on consumption patterns is demographic trends. The
sharp decline in the birth rate has reduced the share of the young in the total population, andthis in turn will reduce the demand for education, and conversely, sharp increases in life
expectancy have increased the share of the aged in the total population, and this in turn will
increase the demand for health-related expenditures.
Yet another possible influence on consumption patterns is technological change.
14

For example, there were rapid improvements in cell phone and internet technology during
the 1991-2003 period, which in turn led to sharp price declines and the introduction of new
products and features like cell phones with email, internet, camera, and video capabilities.
The rapid increase in communication-related expenditures is presumably due in large partto the price declines and new products and features made possible by rapid advances in cell
phone and internet technology.

4. The Causes of the Stagnation of Household Consumption
In section 2, we found that household consumption did not cause the prolonged
slowdown in the Japanese economy, but it is nonetheless true that household consumption
was relative stagnant during this period.

In this section, we analyze the causes of thestagnation of household consumption during the 1991-2003 period (see Bank of Japan
Research Department (1998) for more details).
Economic theory predicts that household consumption will be influenced by thefollowing factors, among others: (1) household disposable income, (2) household wealth,(3) uncertainty about the future (for example, about income, employment, retirement,
public old-age pensions, etc.), and (4) future prospects (for example, about income,
employment, etc.).
These factors may have contributed to the stagnation of household consumption
during the 1991-2003 period if (1) household disposable income had declined or beenstagnant, (2) household wealth had declined, (3) uncertainty about the future had increased,or (4) future prospects had deteriorated during this period. We look at each of thesefactors in turn.

(1) The Stagnation of Household Disposable Income
The average annualized real growth rate of household disposable income was only
15

0.98% during the 1991-2003 period, which is far less than the average annualized real
growth rate of household consumption during the same period (1.56%) and also far lessthan the average annualized real growth rate of household disposable income during the
1980-91 period (3.32%).５

This suggests that the stagnation of household disposable

income was a major cause of the stagnation of household consumption and that it would
have caused household consumption to be even more stagnant had it not been for otherfactors operating in the opposite direction.

(2) The Decline in Household WealthHousehold wealth (net worth) declined during the 1991-2003 period as a whole,due largely to the sharp decline in land and equity prices, and the average annualized real
rate of decline of household wealth during this period was 0.39%.６７ Thus, it is quitepossible that the stagnation of household consumption during this period was due at least
partly to the decline in household wealth (a reverse wealth effect).

(3) Increased Uncertainty about the Future
If the stagnation of household consumption were due to increased uncertainty
about the future, we would expect the household saving rate to have increased, but in fact it
declined steadily and sharply during the 1991-2003 period (except during the 1996-98
period)--from 15.1% in 1991 to 6.4% in 2002 in the case of the unadjusted rate and from
13.3% in 1991 to 5.4% in 2002 in the case of the adjusted rate, a decrease of more than
50% in both cases (see Table 7)! ８

This suggests that the stagnation of household

consumption is not due to increased uncertainty about the future, except possibly during the
1996-98 period, when the household saving rate increased from 9.9% to 11.1% in the caseof the unadjusted rate and from 8.5% to 9.6% in the case of the adjusted rate.９ It is not
surprising to find that the household saving rate showed a temporary upturn during the16

1996-98 period because it is during this period that a spate of bankruptcies (most notably
the bankruptcies of Yamaichi Securities and Hokkaido Takushoku Bank in November 1997)
occurred in the financial sector. These bankruptcies caused increased uncertainty not only
about the health of the financial sector but also about the employment situation because thebankruptcies entailed large-scale layoffs of workers.
Additional verification of the importance of uncertainty about the future can beobtained from data on saving motives, etc., from the Public Opinion Survey on Financial
Assets and Liabilities, conducted annually by the Central Council for Financial Services
Information. As Table 8 shows, the proportion of respondents saving for illness andunforeseen emergencies has not shown a clear trend over time, and the proportion savingfor peace of mind increased only moderately and only until 1999, which provides further
corroboration that increased uncertainty about the future is not a major cause of thestagnation of household consumption.

However, Table 8 also shows that the proportion of

respondents saving for old age has increased sharply over time (from 50.5% in 1991 to
60.4% in 2003), and moreover, Table 9 shows that the proportion of under-60 respondents
who are worried about old age has increased sharply over time, from 63.7% in 1992 to
87.9% in 2003 and that the proportion of these respondents who are worried about old age
because pensions and insurance are not adequate increased from 55.5% to 72.2% over thesame time period, making it the reason that increased the most in importance.１０ Thissuggests that increased uncertainty about old age and about old-age pensions did contributetoward the stagnation of household consumption.
In a related line of research, Horioka and Watanabe (1997) and Horioka, et al.
(2000) calculate the amount of saving for each motive and find that the retirement andprecautionary motives are by far the most important motives for saving and that they are far
more important in Japan than they are in the United States. Similarly, Horioka, Murakami,
and Kohara (2002) and Horioka, Kohara, and Murakami (2004) find that dissaving is the17most common way in which the Japanese deal with unforeseen emergencies, which
corroborates the importance of the precautionary motive as a motive for saving in Japan
from the other side of the ledger.
A number of studies have analyzed the importance in Japan of precautionarysaving arising from various types of uncertainty. For example, Ginama (1988), Ogawa(1991), Doi (2001), and Zhou (2003) analyze the importance of precautionary saving
arising from income risk. Ginama (1988), Ogawa (1991), and Zhou (2003) find that
precautionary saving arising from income risk is relatively unimportant except at the timeof the first oil crisis and except for the self-employed and farmers, and Doi (2003) findsthat it is of some importance in the case of salaried worker households but that employment
risk is not important (but see also the next subsection). Murata (2003a, 2003b) looks at
the importance of precautionary saving arising from uncertainty about overall economic
conditions and from uncertainty about public old-age pensions and finds that the former is
not important but that the latter is. Nakagawa (1999) analyzes the importance of different
types of uncertainty on the household saving rate in Japan by age and income and finds thatdifferent types of uncertainties are important for different age and income groups: he findsthat income risk is important for the low- to middle-income, that employment risk isimportant for the middle-aged and aged low-income, that uncertainty about public old-age
pensions is important for the young, and that the risk of becoming bedridden is important
for the aged. Finally, Saito and Shiratsuka (2003a, 2003b) analyze the impact of various
types of uncertainty on the household saving rate and find that uncertainty about
employment and price deflation and, to a lesser extent, overall uncertainty and uncertainty
about income exert upward pressure on the household saving rate.１１
Thus, the available evidence is not always consistent, but it suggests that
precautionary saving arising from income risk or employment risk has generally not been
all that important nor has it increased over time but that precautionary saving arising from18

uncertainty about old age in general and about public old-age pensions in particular isimportant and has increased over time and hence that it may have contributed to thestagnation of household consumption during the 1990s.

(4) The Deterioration of Future Prospects
In the previous subsection, we discussed the impact of increased uncertainty
concerning the future, but a closely related factor is the deterioration of future prospects.
If household expectations concerning future incomes, future employment prospects, etc.,
deteriorate, this should cause them to reduce their current consumption. In addition tolooking at the impact of income and employment uncertainty, Doi (2001, 2003) also looks
at the impact of the deterioration of income and employment prospects on the householdsaving rate in Japan and finds that reduced employment prospects have had a positive andsignificant impact on Japan’s household saving rate but that the impact of reduced income
prospects is marginal at best.

Japan’s unemployment rate has increased steadily

throughout the 1990s, reaching its highest level ever (5.5%) in August 2002 and declining
only moderately thereafter.

Thus, Doi’s finding that reduced employment prospects haveinduced Japanese households to save more and consume less is not at all surprising.

(5) Other Factors
Turning finally to other factors that may have influenced the level of household
consumption, (1) the profits of individual proprietors have been stagnant during the current
slowdown, putting a damper on the consumption of individual proprietors and (2)deflationary expectations concerning consumer prices may have depressed household
consumption because consumer prices have been falling since the mid-1990s (with the
exception of 1997) and price deflation means that the longer one waits, the cheaper one canbuy a given item. By contrast, (3) price deflation might actually stimulate household
19consumption because it increases the real value of household asset holdings; (4) near-zero(nominal) interest rates may have depressed household saving and boosted household
consumption to the extent that the interest elasticity of saving is positive, (5) the rapid agingof the population may also have boosted household consumption because the elderly
typically finance their living expenses in large part by decumulating their previously
accumulated savings, as a result of which their propensity to consume is typically higher
than that of the working-age population, and (6) the introduction of a public nursing careinsurance program in 2000 may have weakened the perceived need to save, thereby
boosting consumption. Thus, there are factors working in both directions, and the factorsthat exert upward pressure on household consumption have presumably prevented thestagnation of household consumption from becoming worse than it would have beenotherwise.

(6) Summary
In sum, the evidence suggests that the stagnation of household disposable income
and the decline in household wealth (the latter of which was due primarily to the collapse ofland and equity prices) appear to have been the main causes of the stagnation of household
consumption during the 1990s. Increased uncertainty about the future does not appear tohave been a major cause of the stagnation of household consumption during the decade as awhole, but it does appear to have been of some importance during the 1996-98 period, andincreased uncertainty about old age in general and about public old-age pensions inparticular may have contributed to the stagnation of household consumption during theperiod as a whole.

5. Demand Side vs. Supply Side Factors
Thus far, I have focused on the demand side in my search for the causes of the20

prolonged slowdown of the Japanese economy in the 1990s, and many other authors
including Bayoumi (2001), Harada and Iwata (2002), Noguchi (2002, 2004), Posen (1998),
and Takemori (2002) also emphasize the importance of demand side factors. However,other authors including Hayashi (2003), Hayashi and Prescott (2002), Kawamoto (2004),
Kobayashi and Inada (2005), Kobayashi and Katou (2001), Miyagawa (2003, 2004), andOgawa (2003) emphasize the importance of supply side factors (see Miyao (2006) for aconcise and useful survey１２).
Authors who find that demand side factors are more important as explanations of
the prolonged slowdown of the Japanese economy emphasize the importance of suchfactors as (1) the sharp curtailment in bank lending (the so-called “credit crunch”) and theincrease in systemic risk, both of which were caused by the financial crisis and theproliferation of non-performing loans, which in turn were caused by the collapse of the
bubble economy of the late 1980s and the subsequent decline in asset (land and equity)
prices, (2) a further curtailment of bank lending due to the untimely introduction of theBasel guidelines for capital adequacy in 1993, (3) the inadequacy of government actions
aimed at resolving the financial crisis and the non-performing loan problem, (4) inadequate
monetary and fiscal stimulus leading to inadequate aggregate demand, (5) increased
uncertainty about future prospects for the Japanese economy as well as increased volatility,and (6) massive overinvestment in corporate plant and equipment during the bubble years(due in large part to overly expansionary monetary policy), which induced firms to sharply
curtail fixed investment during the post-bubble years as a way of reducing excess capacity
in the corporate capital stock.
Turning to authors who emphasize the importance of supply side factors, Hayashi
and Prescott (2002) find that the prolonged slowdown of the Japanese economy during the
1990s was due primarily to the decline in the growth rate of total factor productivity andto the reduction in working hours from 44 hours per week to 40 hours per week during the21

1988-93 period pursuant to the revision of the Labor Standards Law in 1988 and that it was
not due to the breakdown of the financial system (except during the 1996-98 period). By
contrast, Kawamoto (2004) finds little or no decline in the pace of technological change
during the 1990s and attributes the measured slowdown in productivity growth (andeconomic growth) to cyclical fluctuations in the utilization of capital and labor and in thereallocation of inputs across sectors. As another example, Kobayashi and Inada (2005)
finds that the economic slowdown during the early 1990s was due to the downward rigidityof nominal wages, which increased real wages and induced companies to cut back on
employment. Finally, Miyao (2006) finds that, at least since 1993, persistent negative
productivity shocks have caused the GDP gap to widen and that they also had feedbacks
effects on aggregate demand by causing long-term growth prospects to deteriorate.
This discussion has shown that the prolonged slowdown of the Japanese economy
in the 1990s was due to both demand side and supply side factors and, moreover, that thetwo are often closely interrelated.

Thus, there is no easy answer to the question ofwhether demand side factors or supply side factors were more important, but my reading of
the data and of the literature convinces me that demand side factors were probably more
important and that the single most important cause of the prolonged slowdown of theJapanese economy in the 1990s was the stagnation of private fixed investment, which inturn was caused by overinvestment in plant and equipment during the bubble economy of
the late 1980s, the collapse of asset prices during the post-bubble period, and an inadequate
policy response to these events. In particular, I feel that policy mistakes during the bubble
period (e.g., overly expansionary monetary policies) as well as during the post-bubble
period (e.g., overly contractionary fiscal and monetary policies and the inadequacy of
government actions aimed at resolving the financial crisis and the non-performing loan
problem) are largely to blame.１３22

6. Conclusion
In this paper, I analyzed the causes of the prolonged slowdown of the Japanese
economy in the 1990s and found that the stagnation of investment, especially private fixed
investment, was the major culprit of the prolonged slowdown and that the stagnation of
spending on clothing and footwear, transport, and to a lesser extent, miscellaneous goods
and services, education, and food and non-alcoholic beverages were the main culprits of thestagnation of household consumption. By contrast, I found that the main factors holding
up GDP growth were household consumption, government consumption, and net exports
and that the main factors holding up household consumption growth were spending on
health, communication, and to a lesser extent, restaurants and hotels and housing-related
expenditures.

I also found that the stagnation of household consumption was due

primarily to the stagnation of household disposable income, the decline in household
wealth (which in turn was due primarily to the collapse of land and equity prices), and to alesser extent, increased uncertainty about the future (especially about old age in general andpublic old-age pensions in particular), the deterioration of future prospects, etc.

Finally, I

considered whether demand side factors or supply side factors were more important ascauses of the prolonged slowdown of the Japanese economy in the 1990s and concluded
that the former (especially misguided government policies) were probably more important.
Turning to the policy implications of my analysis, my findings suggest that theeconomic policies of the Japanese government were largely misguided during the bubble
period of the late 1980s as well as during the post-bubble period of the 1990s. For
example, monetary policy should have been tightened sooner during the bubble period toprevent the persistence of such a pronounced bubble, and conversely, monetary policy
should have been loosened sooner, more fiscal stimulus should have been provided, and thegovernment should have acted sooner to resolve the financial crisis and the non-performing
loan problem during the post-bubble period. In particular, the government should have23

done more to stimulate private investment in housing and plant and equipment as well ashousehold consumption, and in my opinion, the best way of doing so would have been to
introduce temporary and targeted tax breaks for housing and plant and equipment
investment, household consumption, etc.

There are those who oppose tax breaks of any

kind because Japan already has the highest government debt-to-GDP ratio of any majorindustrialized nation in the world, but I feel that such temporary and targeted tax breaks
should have been implemented for the following reasons: (1) the Japanese economy
required further stimulus to recover more quickly, and in the absence of such stimulus, tax
revenues declined even further, thereby causing the government debt to increase evenfurther, (2) temporary and targeted tax breaks would have increased the government debt
far less thanmore permanent and/or broad-based tax cuts, and (3) the tax breaks would

have been more effective if they had been temporary because temporary tax breaks would
have induced firms and consumers to accelerate their purchases of the goods and services
being targeted in order to take advantage of the tax breaks before they expired.

A

temporary tax break for housing investment was tried and proved to be successful,suggesting that similar temporary tax breaks for investment in plant and equipment,
research and development, and consumption would also have been effective.
My analysis suggests that an alternative way of stimulating household
consumption would have been to reduce uncertainty about the future, especially about old
age in general and about public old-age pensions in particular--for example byfundamentally reforming the public old-age pension system to make it solvent as well as
equitable. In 2003, there was a sharp increase not only in the proportion of people savingfor old age but also in the proportion of people who are worried about old age because of
the inadequacy of pensions and insurance (see Tables 6-7). Thus, there was an urgent
need to allay people’s fears about public old-age pensions, and doing so would haveconferred the added benefit of stimulating household consumption.
24

Turning finally to policy recommendations that target the supply side, Hayashi and
Prescott’s (2002) findings imply that subsidies to inefficient firms and declining industries
should have been discontinued since they presumably lower the overall rate of productivity
growth.

Such a policy would have brought about an improvement in government financesin addition to enhancing productivity growth and hence would have killed two birds with
one stone.
Now that the Japanese economic is staging a modest recovery, there may no longer
be any need for stimulative fiscal and monetary policies, but at the very least, the Japanese
government should be very cautious about tightening either fiscal or monetary policy until
the economy has fully recovered to prevent the economy from slipping back into recession.
Acknowledgements
I am grateful to an anonymous referee, Anton Braun, Robert Dekle, Sheldon Garon, Fumio
Hayashi, Takeo Hoshi, Michael Hutchison, Nazrul Islam, Douglas Joines, Akira Nagae, Tae
Okada, Keunkwan Ryu, Shinpei Sano, Shizuka Sekita, Dong Shen, Dariusz Stanko, Midori
Wakabayashi, Junmin Wan, Frank Westermann, Keiko Yoshida, Yanfei Zhou, participantsof the CESifo Venice Summer Institute (VSI) Workshop on “Economic Stagnation in
Japan,” which was held July 25-26, 2003, in Venice, Italy, and especially BernadetteAndreosso-O’Callaghan (the designated discussant) for their helpful and insightfulcomments. The author is also grateful to the Ministry of Education, Culture, Sports,
Science and Technology of the Japanese Government for Grant-in-Aid for Scientific
Research number 12124207, which supported this research.

25

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32

Figure 1: Trends over Time in GDP and Consumption Growth
8.0
7.0
6.0
5.0

Percent

4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
2.9 2.8 1.6 3.1 5.1 3.0 3.8 6.8 5.3 5.2 3.4 1.0 0.2 1.1 1.9 3.4 1.9 -1.1 0.1 2.9 0.4 -0.5 2.5GDPConsumption 1.8 4.4 3.2 2.5 3.5 3.4 4.0 4.7 4.6 4.4 3.0 2.6 1.6 2.7 2.1 2.6 0.9 -0.0 0.7 1.7 1.9 0.8 1.2
Calendar Year

Note: See Table 1 for the definition of consumption.
Source: The same as Table 1.

33

Table 1: The Average Annualized Real Growth Rate and the Contribution to Real GDP Growth ofEach Component of GDP, 1980-2003

Component of GDP
Actual final consumption of households
Government actual final consumption
Private gross domestic fixed capital formation
Housing
Plant and equipment
Public gross domestic fixed capital formation
Dwellings
Plant and equipment
General government
Changes in inventories (inventory investment)
Net exports of goods and services
Exports of goods and services
Imports of goods and services
Gross domestic expenditure (product)

Average Annual Real
Growth Rate (percent)1980-91
1991-2003
3.59
3
1.56
3
3.54
4
3.22
2
6.11
2 -0.595(2.44)(-2.48)(7.44)(-0.14)0.85
5 -0.244(-0.53)(-0.89)(-2.85)(-1.06)(2.45)(0.02)
9.56
1
na 6
0.78
6
6.39
1
(4.61)(4.26)(5.94)(3.63)
3.89
1.14

Contribution to Real
Growth Rate of GDP
1980-91
1991-2003
57.24
1 85.40
1
5.45
3 18.642
34.09
2 -11.49
6(3.54)(-9.27)(30.54)(-2.22)
1.67
4 -1.26
4(-0.04)(-0.15)(-1.56)(-1.18)(3.26)(0.07)
1.14
5 -4.35
50.42
6 13.073(9.68)(37.78)(9.26)(24.71)100.00100.00Notes: The average annual real growth rate of component X between year t1 and year t2 was calculated as[(X(t2)-X(t1))**(1/(t2-t1)) - 1]*100.
The contribution of component X to real GDP growth was calculated as [X(t2) - X(t1)]*100/[GDP(t2)GDP(t1)].

The "actual final consumption expenditure of households" is the sum of the final consumption expenditure ofhouseholds and social transfers in kind received.
The Japanese government switched from the fixed base year method to the chain linking method in 2004, but
all data shown in this paper are based on the previous fixed base year method because data based on the
chain linking method are available only since 1994 and are available only for the main aggregates.
The figures to the right of each figure indicate the rank of that figure.
Source: Naikakufu Keizai Shakai Sougou Kenkyuusho (Economic and Social Research Institute, Cabinet
Office, Government of Japan), ed., Kokumin Keizai Keisan Nenpou (Annual Report on National Accounts) ,2005 edition (Tokyo: Media-Rando Kabushiki Kaisha, 2005).

34

Table 2: The Composition of GDP, 1980-2003
Component of GDP
Actual final consumption of households
Government actual final consumption
Private gross domestic fixed capital formation
Housing
Plant and equipment
Public gross domestic fixed capital formation
Dwellings
Plant and equipment
General government
Changes in inventories (inventory investment)
Net exports of goods and services
Exports of goods and services
Imports of goods and services
Gross domestic expenditure (product)

The Share of Each Component in Real GDP
1980
1991
2003
62.91
1
60.97
1
64.08
6.10
4
5.88
4
7.50
19.31
2
24.38
2
19.81
(6.08)(5.21)(3.36)(13.24)(19.17)(16.44)
8.91
3
6.43
3
5.45
(0.36)(0.22)(0.17)(2.99)(1.43)(1.10)(5.57)(4.78)(4.18)
0.34
6
0.62
6
-0.02
2.42
5
1.73
5
3.18
(7.87)(8.49)(12.22)(5.45)(6.76)(9.04)
100.00100.00100.00Note: The figures show the share of each component of real GDP in real GDP (in percent).
Also see the notes to Table 1.
Source: The same as Table 1.

35

1
3
2

4

6
5

Table 3: The Decline in the Growth Rate and the Contribution to the Decline in Real GDP Growth ofEach Component of GDP, 1980-2003

Component of GDP
Actual final consumption of households
Government actual final consumption
Private gross domestic fixed capital formation
Housing
Plant and equipment
Public gross domestic fixed capital formation
Dwellings
Plant and equipment
General government
Changes in inventories (inventory investment)
Net exports of goods and services
Exports of goods and services
Imports of goods and services
Gross domestic expenditure (product)

Change in the GrowthRate, 1980-91 vs. 19912003 (percent)
-2.03
4
-0.32
2
-6.70
5
(-4.92)(-7.59)-1.09
3(-0.36)(1.79)(-2.44)na
65.60
1(-0.35)(-0.32)-2.75

Contribution to the
Decline in Real GDP
Growth, 1980-91 vs.
1991-2003 (percent)
36.34
2
-4.33
5
67.91
1
(13.05)(54.86)3.84
4(0.05)(-1.84)(5.63)
5.22
3
-8.98
6
(-11.18)(-2.20)100.00Notes: The contribution of each component to the decline in real GDP growth between 1980-91 and 19912003 was calculated as the ratio between the decline in the change in that component between 1980-91 and1991-2003 and the decline in the change in GDP between 1980-91 and 1991-2003 (in percent). "na"denotes "not available."
Also see the notes to Table 1.
Source: The same as Table 1.

36

Table 4: The Average Annualized Real Growth Rate and the Contribution to the Real Growth ofHousehold Consumption of Each Component of Household Consumption, 1980-2003
Contribution to the Real
Annual Annualized Real
Growth of Household
Growth Rate (percent)Consumption (percent)1980-91
1980-91
1991-2003
1991-2003
Purpose of Expenditure
Food and non-alcoholic beverages
1.21 10
-0.02
9
5.83
7
-0.21
9
Alcoholic beverages and tobacco
1.06 11-0.17 101.03 11-0.31 10
Clothing and footwear
1.85
8-2.73 123.98
8-9.83 12
Housing, electricity, gas and water supply
3.76
7
2.19
4
21.15
1
30.11
1
Imputed service of owneroccupied dwellings(4.05)(2.34)(15.68)(22.65)
Furnishings, household equipment andhousehold services
5.60
3
1.12
6
6.53
6
3.32
7
Health
3.82
6
3.66
2
10.49
5
26.80
2
Out-of-pocket(2.04)(2.92)(1.81)(5.98)
Social benefits in kind received(4.67)(3.95)(8.68)(20.81)
Transport
5.29
5
0.53
8
13.74
3
3.29
8
Communication
7.93
1
11.69
1
1.96 10
15.32
4
Recreation and culture
7.72
2
2.99
3
17.90
2
21.76
3
Education
0.99 12-1.15 110.75 12-1.52 11
Restaurants and hotels
1.78
9
1.88
5
3.25
9
7.36
5
Miscellaneous goods and services
5.60
3
0.66
7
13.38
4
3.90
6
Domestic final consumption expenditureof households
3.61
1.54
100.00100.00Notes: The average annual real growth rate of component X between year t1 and year t2 was calculated as[(X(t2)-X(t1))**(1/(t2-t1)) - 1]*100.
The contribution of component X to the real growth of household consumption C was calculated as [X(t2) X(t1)]*100/[C(t2)-C(t1)].
Household consumption is the sum of the final consumption expenditure of households plus social benefits
in kind received, and the entire amount of social benefits in kind received are included in "health."
The figure for total consumption in this table do not exactly match the figure for household consumption in
Tables 1-3 because the figures in this table refer to "domestic final consumption expenditure of households"
whereas the figures in Table 1-3 refer to "final consumption expenditure of households," with the difference
between the two being that the former exclude "direct purchases abroad by resident households" and "directpurchases in the domestic market by non-resident households" whereas the latter include both, and because
the figures in Tables 1-3 include "transfers of individual non-market goods and services" from thegovernment and from private non-profit institutions serving households whereas the figures in this table donot.
The figures to the right of each figure indicate the rank of that figure.
Source: The same as Table 1.

37

Table 5: The Composition of Household Consumption, 1980-2003
The Share of Each Component in Household
Consumption (percent)
1980
1991
Purpose of Expenditure
2003
Food and non-alcoholic beverages
19.64
2
15.18
2
12.60
3
Alcoholic beverages and tobacco
3.97
93.02 10
2.46 11
Clothing and footwear
8.48
5
7.03
7
4.20
9
Housing, electricity, gas and water supply
20.14
1
20.47
1
22.09
1
Imputed service of owneroccupied dwellings(13.64)(14.30)(15.70)Furnishings, household equipment andhousehold services
3.79 10
4.67
9
4.45
8
Health
9.80
3
10.02
5
12.84
2
Out-of-pocket(3.46)(2.93)(3.44)
Social benefits in kind received(6.34)(7.10)(9.40)
Transport
8.58
4
10.25
4
9.08
5
Communication
0.71 12
1.12 123.50 10
Recreation and culture
6.74
8
10.34
3
12.26
4
Education
3.13 112.36 111.71 12
Restaurants and hotels
7.24
7
5.95
8
6.19
7
Miscellaneous goods and services
7.78
6
9.59
6
8.63
6
Domestic final consumption expenditureof households
100.00100.00100.00Note: See the notes to Table 4.
Source: The same as Table 1.

38

Table 6: The Decline in the Growth Rate and the Contribution to the Decline in the Real
Growth of Household Consumption of Each Component of Household Consumption, 19801991 vs. 1991-2003

Purpose of Expenditure
Food and non-alcoholic beverages
Alcoholic beverages and tobacco
Clothing and footwear
Housing, electricity, gas and water supply
Imputed service of owneroccupied dwellings
Furnishings, household equipment andhousehold services
HealthOut-of-pocket
Social benefits in kind received
Transport
Communication
Recreation and culture
Education
Restaurants and hotels
Miscellaneous goods and services
Domestic final consumption expenditureof households

Contribution to the
Decline in the Real
Change in the Growth
Growth of Household
Rate, 1980-91 vs. 1991- Consumption, 1980-91
2003 (percent)vs. 1991-2003 (percent)
-1.23
4
15.91
4
-1.23
4
3.25
9
-4.58
9
27.04
3
-1.57
6
6.19
7
(-1.71)-4.48-0.16(0.88)(-0.72)
-4.77
3.77
-4.73
-2.15
0.10
-4.94
-2.06

(4.04)
8
3

11
1
10
7
2
12

11.89
-16.74(-5.17)(-11.57)
31.18-20.32
11.46
4.55
-3.61
29.21
100.00Notes: The contribution of each component to the decline in the real growth of household
consumption between 1980-91 and 1991-2003 was calculated as the ratio of the decline in thechange in that component between 1980-91 and 1991-2003 to the decline in the change inhousehold consumption between 1980-91 and 1991-2003 (in percent).
Also see the notes to Table 4.
Source: The same as Table 1.

39

5
11

1
12
6
8
10
2

Table 7: Trends in the Household Saving Rate, 1980-2003
Calendar
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

Unadjusted Household Saving Rate
17.3
18.2
16.8
16.2
16.1
15.5
14.8
13.1
13.5
13.6
13.9
15.1
14.2
13.7
12.6
11.9
9.9
10.0
11.2
10.8
9.6
6.7
7.3
7.5

Adjusted Household Saving Rate
15.4
16.2
14.9
14.3
14.3
13.7
13.0
11.5
11.9
12.0
12.3
13.3
12.5
12.0
11.1
10.4
8.5
8.7
9.6
9.3
8.2
5.7
6.1
6.3

Notes: The household saving rate was calculated as the ratio of net household saving to the sumof net household disposable income and "changes in pension reserves in pension funds,
receivable." The unadjusted rate does not include "social transfers in kind" in the denominator,
whereas the adjusted rate does.
Source: The same as Table 1.

40

Table 8: The Proportion of Respondents Who Are Saving for Each Motive, 1984-2005
Saving Motive
CalendarIllness and Other
Living Expenses during Old
Year
Unforeseen Emergencies
Peace of Mind
Age
1984
75.0
25.7
42.1
1985
77.2
26.4
42.5
1986
75.0
25.3
42.5
1987
76.4
26.1
46.1
1988
77.1
28.0
50.2
1989
80.5
28.7
51.5
1990
74.3
25.7
52.4
1991
73.3
23.7
50.5
1992
68.3
23.0
48.2
1993
70.9
23.5
50.1
1994
69.4
24.2
51.6
1995
71.2
25.2
52.9
1996
69.7
25.9
53.9
1997
69.1
24.9
53.2
1998
73.3
24.5
55.3
1999
71.9
27.5
56.7
2000
67.5
27.1
55.9
2001
69.4
26.2
58.6
2002
69.1
26.9
56.9
2003
73.3
25.4
60.4
2004
65.9
26.0
57.4
2005
66.8
25.3
58.7
Note: The figures show the proportion of respondents saving for each motive (in percent).
Source: Kin’yuu Kouhou Chuuou Iinkai (The Central Council for Financial Services
Information), ed., Kakei no Kin’yuu Shisan ni kansuru Yoron Chousa (Public Opinion
Survey on Household Financial Assets and Liabilities) , 2005 edition (Tokyo: Kin’yuu
Kouhou Chuuou Iinkai (The Central Council for Financial Services Information), 2005), andearlier editions of the same.

41

Table 9: The Proportion of Respondents Who Are Worried about Old Age, 1984-2005
The Proportion of Under-60
Respondents Who Are Worried about
The Proportion of Under-60
Old Age Because Pensions andRespondents Who Are Worried
CalendarInsurance Are Inadequate (percent)
about Old Age (percent)
Year
1984
na
49.1
1985
na
60.6
1986
na
64.5
1987
na
63.5
1988
na
69.6
1989
na
71.0
1990
na
68.0
1991
na
60.8
1992
63.7
55.5
1993
62.0
59.5
1994
69.9
59.1
1995
71.6
56.9
1996
71.3
59.0
1997
78.8
63.1
1998
85.5
67.1
1999
84.1
66.9
2000
84.7
68.1
2001
84.3
66.5
2002
86.6
66.7
2003
87.9
72.2
2004
86.1
66.4
2005
84.4
68.1
Notes: The denominator in the right-hand column is the number of under-60 respondents
who are worried about old age. "na" denotes "not available."
Source: The same as Table 8.

42Endnotes

１“Social benefits in kind,” the largest component of “social transfers in kind,” were

included in household consumption under the older 1968 System of National Accounts towhich Japan adhered until 2000, and “social transfers in kind” are included in their entirety
in “actual” household consumption (an alternate consumption concept) under the newer
1993 System of National Accounts to which Japan has adhered since 2000.
２

This conclusion ignores second- and higher-order effects. For example, the stagnationof consumption might have induced firms to cut back on their investment spending.

I amindebted to Keunkwan Ryu for this point.
３

Since “social benefits in kind” are available only in nominal terms, I converted them into

real terms using the price deflator for the health component of household consumption.
４

The data appear to show that income inequality increased in Japan during the 1990s, but

Ohtake (2005) argues that the apparent trend toward greater inequality is largely a statisticalartifact (except in the case of young cohorts) arising from the aging of the population andthe decline in average household size.

５

All of these figures denote the average annualized real rate of growth of household

disposable income (inclusive of social transfers in kind) deflated by the price deflator for
actual household consumption (inclusive of social transfers in kind).

43

６

The average annualized real rate of decline of household wealth was calculated by

deflating household wealth by the price deflator for actual household consumption. Sincehousehold wealth is evaluated at the end of the each calendar year, I calculated theend-of-year price deflator by averaging the price deflators for the fourth quarter of thecurrent year and the first quarter of the following year.

７

Ando (2002) and Ando, et al. (2003) attribute the stagnation of household wealth in largepart to the low dividend-payout ratio of Japanese corporations, which is another way ofsaying that Japanese corporations overinvested in physical assets, at least during the bubble
period.

The high growth rates of private fixed investment during the 1980-91 period in

Table 1 corroborate Ando’s contention.
８

The difference between the two rates is that the latter includes “social transfers in kind”

in the denominator whereas the former does not. See the second paragraph of section 2
for a definition of “social transfers in kind.”.
９

It is, of course, possible that households were not able to save more despite their desire

to do so because of stagnant household income and wealth.

１０This is not surprising because Japan’s public pension system has been periodicallyreformed to keep it solvent in the face of rapid population aging—with contribution rates
being increased, benefit levels being reduced, and the pensionable age being increased over44

time (see Horioka (2001)).
１１

Saito and Shiratsuka (2003a, 2003b) distinguish between precautionary saving (which

depends on the magnitude of risks) and saving as a waiting option (which depends on how
long it takes for uncertainties about the future to be resolved).

They find that

precautionary saving has been more important since the 1980s but that there is someevidence of saving as a waiting option in the 1990s.
１２

Also see the papers in Blomstrom, et al. (2003), Callen and Ostrey (2003), Hamada, etal. (2004), Harada and Iwata (2002), Iwata and Mikitani (2003), Mikitani and Posen (2000),
and Saxonhouse and Stern (2004).

１３

For example, as Bernanke (2000), Ito (2004), and Posen (1998) argue, the Bank ofJapan discount rate should not have been cut in February 1987 and should have been raisedin August 1988 when the Federal Reserve and Bundesbank raised interest rates, monetary
policy should have been eased more in the early 1990s, fiscal policy should not have beentightened in April 1997, the Japanese Government mismanaged the financial crisis of
1997-98, and the Bank of Japan should not have ended its zero interest rate policy inAugust 2000..

45