## _wp10293

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### Recent developments with private consumption
- Elderly population ratio (age 65 or over) doubled to 20 percent over the past 20 years.
- Private consumption is the largest component in GDP but its growth has stagnated since the late 1990s.
- Private consumption share peaked around 57 percent in 2002 and fell slightly during the expansion phase 2003–07.
- Private consumption growth 2003–07: 5 percent.
- GDP growth 2003–07: 10 percent.
- As of 2007, Japan’s consumption share was 4 percentage points below that of other G-7 countries.
- Aggregate household saving rate declined steadily since the early 1990s to around 2 percent in 2008.
- Private consumption has been closely tracking household disposable income (figure evidence).

### Aggregate regression evidence on consumption (selected results)
- Dependent variable: Private consumption (in percent of GDP).
- Household disposable income coefficients reported: 0.288**, 0.276**, 0.232, 0.284***, 0.282***.
- Ratio of age 65 or higher coefficients reported: 0.559***, 0.539***, 0.507***, -0.0729, -0.0728.
- Output gap coefficients reported: -0.237***, -0.265***, -0.256***, -0.117**, -0.123**.
- Short-term interest rate coefficients (alternative specifications): 0.1050, 0.09870, 0.0163.
- CPI inflation coefficients (alternative specifications): -0.263**, -0.272**, -0.0111.
- Household net worth coefficient: -0.00181 (insignificant in reported regression).
- R^2 values reported: 0.9240, 0.9490, 0.9500, 0.4700, 0.470.
- Number of observations: 26, 26, 26, 134, 134 (sample period noted as 1980-2005 except for missing observations).
- Notes: G-7 panel regressions are conducted by taking first differences to control for country-specific fixed effects and potential unstationarity. Year dummy included in some specifications.

### Interpretation of recent developments
- Sluggish consumption in recent years is attributed to stagnant household disposable income rather than rising household saving.
- Time series regressions find a positive relationship between household disposable income and consumption share; the elderly ratio is also positively associated with consumption share, consistent with a standard life-cycle model.
- Wealth (household net worth) does not show a significant positive effect on the consumption share in the reported regressions; the coefficient on household net worth is negative and insignificant.

### Policy attempts to boost consumption (historical overview)
- Plaza Accord (1985): Commitments to open markets and deregulation to stimulate domestic demand; concurrent expectation of further appreciation of the yen.
- Maekawa Report (1986): Strategy to reduce current account surpluses by expanding domestic demand and increasing imports; recommended personal income tax cuts, development of the services sector, deregulation, preferential tax treatment for housing, increased public investment, facilitation of inward FDI, regulatory reform, financial market liberalization, and flexible fiscal and monetary policies.
- Louvre Accord (1987): Agreement to stimulate domestic demand with flexible fiscal and monetary policies.
- Implementation since the late 1980s and 1990s included:
  - Structural measures: “Financial Big Bang”, regulatory reforms across retail, transportation, telecom, and utilities, relaxation of entry barriers to large-scale retailers, and reduction in average working hours (from 2,100 hours per year in the 1980s to around 1,800 hours).
  - Fiscal policy: Series of income tax cuts with personal income tax revenue declining by 1 percentage point of GDP between 1985 and 1995; central and local governments expanded public investment by 40 percent (in nominal terms) between 1985 and 1990.
  - Monetary policy: BoJ policy rate was 2.5 percent in February 1987 and maintained until May 1989.
- These measures contributed to higher domestic demand and helped raise the consumption share from 52 percent of GDP in 1991 to 57 percent in the early 2000s, alongside the sharp rise in the elderly ratio.

### Main drivers of private consumption: wages and property income
- Between 2000–07:
  - Wages declined by 3 percent in nominal terms.
  - Household property income fell 14 percent.
- Wage share of GDP fell from 47 percent in 1995 to 44 percent in 2007.
- Nonregular workers: 30 percent in 2009 from 15 percent in 1995.
- Household property income: about 4 percent of household disposable income in 2007; 20 percent in the United States (2007).
- After the asset bubble collapse around 1990, household property income steadily declined led by falls in interest and dividend income; recovered somewhat in the early 2000s but remained low.
- Housing assets were nearly 300 percent of household disposable income in Japan in 2000, compared to about 150 percent in the U.S.

### Low share of risky assets and implications
- Risky assets (shares, equities, and trusts) account for only 10 percent of overall financial assets in Japan versus 40 percent in the U.S.
- Deposits and currency account for nearly 60 percent of financial assets in Japan and have earned a low rate of return over the past decade (typically less than 0.5 percent), depressing household property income.
- If household property income could rise to the U.S. level in 2007 (14 percent of GDP) through higher investment returns and a higher share of risky assets, GDP could increase by at least 1–2 percentage points assuming MPC of 10–20 percent from household property income.
- Dividend payments in Japan were only 2½ percent of GDP during 2003–2007, compared to 5–10 percent of GDP in other G-5 economies.
- Stock dividend yields remained lower than 10-year JGB yields throughout the 2000s.
- Right before the global financial crisis (2007), the dividend payout ratio of nonfinancial corporations rose to about 15 percent, but was still well below the G-7 average (50 percent).
- Large crossholdings of stocks historically reduced pressure on companies to issue dividends; recent unwinding of crossholdings could support a future pickup in payout ratios.
- Survey evidence: 44 percent of Japanese households consider safety in financial investment of utmost importance—more than 15 percentage points higher than in the United States.
- The collapse of the bubble in the early 1990s may have strengthened risk aversion among Japanese households.

### Does household property income affect private consumption? (micro evidence)
- Data and estimation: Japanese Panel Survey of Consumers (JPSC) micro panel data; linear Euler equation ∆Ci,t = β0 + β1∆Pi,t-1 + β2Zi,t + εi,t, where ∆Ci,t is year-on-year change in consumption (September, in percent), ∆Pi,t-1 is annual change in property income in year t-1 (in percent of total income), and Zi,t is a vector of controls (household head’s age, age squared, number of family members, education dummies, occupation dummies, industry dummies, time dummies).
- Regression findings:
  - Coefficients on the lagged change in property income are in the range of 0.1–0.2, implying an MPC from property income of approximately 10–20 percent (given household consumption is over 90 percent of household total income).
  - Instrumental variable (IV) estimates using ∆Pi,t-2 as an instrument are insignificant but larger than OLS estimates, suggesting OLS estimates (around 0.1) could be interpreted as a lower bound.
  - Estimates cannot distinguish temporary from permanent changes in property income; estimated MPCs are likely higher than MPC from a temporary increase but lower than MPC from a permanent increase.
- Quantitative implication:
  - Using MPC of 10–20 percent, a rise of household property income to U.S. 2007 level (14 percent of GDP) could raise GDP by at least 1–2 percentage points.
  - An increase in the stock dividend payout to the 2007 G-7 average (tripling Japan’s 2007 level) alone could produce 0.5–1 percentage point increase in GDP.

### Debt and equity financing patterns constraining consumption smoothing
- Outstanding consumer credit in Japan is 10 percent of GDP versus 25 percent of GDP in the U.S.
- Credit availability distribution in Japan is concentrated among low-risk and high-risk borrowers, with a “middle-risk” gap—partly due to the lack of a comprehensive credit information system similar to U.S. credit bureaus.
- Households’ strong aversion to consumer credit and stigma attached to borrowing from consumer finance companies further limit uptake.
- Reverse home mortgage markets virtually do not exist in Japan; many local government initiatives in the 1980s failed to take hold.
  - Barriers: lack of risk management mechanisms, illiquid used housing markets, favorable tax treatment on land encouraging bequests, and low awareness (only 20 percent knew about reverse home mortgages in 2005).
  - Reverse home mortgages could help stimulate consumption among the elderly but would likely require public assistance (for example, insurance to banks through a government-affiliated institution) and measures to deepen used housing markets.

### Policy options and implications
- Boosting wage growth:
  - Accelerate labor productivity growth in services (still lagging manufacturing), including further reforms in regulated areas such as health care.
  - Labor market reform: introduce a new regular contract with weaker employment protection to encourage hiring of more regular workers, raise incentives to accumulate human capital, and address equity between regular and nonregular workers; grandfather existing permanent contracts to mitigate uncertainty.
- Raising stock returns and diversifying household portfolios:
  - Deregulation to raise productivity could strengthen profitability and improve stock returns, stimulating demand for risky assets.
  - Continued unwinding of cross-shareholdings could encourage greater dividend payouts.
  - Extend incentives for holding non-deposit financial assets (for example, the current reduced tax rate on dividend income from listed stocks is 10 percent (reduced from 20 percent) but is scheduled to be terminated at end-2011).
- Improving access to credit or equity financing:
  - Consumer credit: improve access through greater sharing of credit information between banks and nonbanks; aggregate impact may be limited since demand for consumer finance is concentrated among low-wealth households.
  - Reverse home mortgages: consider public support to jump-start the market (for example, insurance to banks), and deepen markets for used housing, including developing a qualification system for housing to reduce asymmetric information and help banks sell repossessed homes.

### Precautionary savings and social security
- Evidence indicates precautionary savings stem from concerns about future public pension benefits (Murata (2003)).
- Ongoing reforms to enhance the reliability of the public pension system would lessen uncertainty about households’ future income prospects.
- Efforts to improve the government fiscal positions would also reduce uncertainty and thereby help lower households’ precautionary savings.
- Reforms to stimulate private consumption could lift growth in Japan by boosting household disposable income through higher productivity growth and returns, and steps to facilitate shifts in household balance sheets; in particular, the impact of higher household property income on private consumption could potentially be large.

*Source: _wp10293 (IMF PDF).*

### Introduction ...........................................................................................................

### Introduction

### Recent developments with private consumption
- Japan’s elderly population ratio (age 65 or over) has doubled to 20 percent over the past 20 years.
- Private consumption is the largest component in GDP but its growth has stagnated since the late 1990s.
- The private consumption share peaked around 57 percent in 2002 and fell slightly during the expansion phase 2003–07.
- Between 2003–07, private consumption grew at 5 percent compared to 10 percent for GDP.
- As of 2007, Japan’s consumption share was 4 percentage points below that of other G-7 countries.
- The aggregate household saving rate declined steadily since the early 1990s to around 2 percent in 2008.
- Private consumption has been closely tracking household disposable income (figure evidence).

### Aggregate regression evidence on consumption (selected results from Table 1)
- Dependent variable: Private consumption (in percent of GDP).
- Household disposable income coefficients: 0.288**, 0.276**, 0.232, 0.284***, 0.282*** (standard errors reported in table).
- Ratio of age 65 or higher coefficients: 0.559***, 0.539***, 0.507***, -0.0729, -0.0728.
- Output gap coefficients: -0.237***, -0.265***, -0.256***, -0.117**, -0.123**.
- Short-term interest rate coefficients: 0.1050, 0.09870, 0.0163 (in alternative specifications).
- CPI inflation coefficients: -0.263**, -0.272**, -0.0111 (in alternative specifications).
- Household net worth coefficient: -0.00181 (insignificant in reported regression).
- R^2 values reported: 0.9240, 0.9490, 0.9500, 0.4700, 0.470.
- Number of observations: 26, 26, 26, 134, 134 (sample period noted as 1980-2005 except for missing observations).
- Notes: G-7 panel regressions are conducted by taking first differences to control for country-specific fixed effects and potential unstationarity. Year dummy included in some specifications.

### Interpretation of recent developments
- Sluggish consumption in recent years is attributed to stagnant household disposable income rather than rising household saving.
- Time series regressions find a positive relationship between household disposable income and consumption share; the elderly ratio is also positively associated with consumption share, consistent with a standard life-cycle model.
- Wealth (household net worth) does not show a significant positive effect on the consumption share in the reported regressions; the coefficient on household net worth is negative and insignificant.

### Policy attempts to boost consumption (historical overview)
- Key historical commitments and reports aimed at expanding domestic demand:
  - Plaza Accord (1985): Commitments to open markets and deregulation to stimulate domestic demand; concurrent expectation of further appreciation of the yen.
  - Maekawa Report (1986): A government council strategy to reduce large current account surpluses by expanding domestic demand and increasing imports; recommended measures included personal income tax cuts, development of the services sector, deregulation, preferential tax treatment for housing, increased public investment, facilitation of inward FDI, regulatory reform, financial market liberalization, and flexible fiscal and monetary policies.
  - Louvre Accord (1987): Agreement to stimulate domestic demand with flexible fiscal and monetary policies.
- Implementation since the late 1980s and 1990s included:
  - Structural measures: Financial liberalization (“Financial Big Bang”), regulatory reforms across retail, transportation, telecom, and utilities, relaxation of entry barriers to large-scale retailers, and reduction in average working hours (from 2,100 hours per year in the 1980s to around 1,800 hours).
  - Fiscal policy: Series of income tax cuts with personal income tax revenue declining by 1 percentage point of GDP between 1985 and 1995; central and local governments expanded public investment by 40 percent (in nominal terms) between 1985 and 1990.
  - Monetary policy: BoJ lowered its policy rate to 2.5 percent in February 1987 and maintained that level until May 1989.
- These measures contributed to higher domestic demand and helped raise the consumption share from 52 percent of GDP in 1991 to 57 percent in the early 2000s, alongside the sharp rise in the elderly ratio.

### Main drivers of private consumption: wages and property income
- Wages and property income are the main components of household disposable income and have both stagnated.
- Between 2000–07:
  - Wages declined by 3 percent in nominal terms.
  - Household property income fell 14 percent.
- Wages:
  - The share of wages in GDP fell from 47 percent in 1995 to 44 percent in 2007.
  - Global factors affecting wages include technological change and globalization; domestic factors include lower productivity growth in services relative to manufacturing.
  - The increasing share of nonregular workers may have depressed wages and increased job uncertainty: nonregular workers' share rose to 30 percent in 2009 from 15 percent in 1995.
  - Strong employment protection for regular workers may have limited competition and productivity growth, holding back wages.
- Property income:
  - After the asset bubble collapse around 1990, household property income steadily declined led by falls in interest and dividend income.
  - Household property income recovered somewhat in the early 2000s but remained low at about 4 percent of household disposable income in 2007.
  - By comparison, household property income was 20 percent in the United States in 2007 and well below other G-7 economies.
  - Household financial asset composition (as of end 2008) shows Japan with relatively low shares in equities, trusts and higher shares in deposits & currency compared with the U.S. (figure evidence).

### Key statistics and markers (preserved exactly)
- Elderly population ratio (age 65 or over) doubled to 20 percent over the past 20 years.
- Private consumption growth 2003–07: 5 percent.
- GDP growth 2003–07: 10 percent.
- Private consumption share peak: around 57 percent in 2002.
- Japan’s consumption share in 2007: 4 percentage points below other G-7 countries.
- Aggregate household saving rate: around 2 percent in 2008.
- Consumption share rose from 52 percent in 1991 to 57 percent in the early 2000s.
- Wages declined by 3 percent between 2000–07 (nominal terms).
- Household property income fell 14 percent between 2000–07.
- Wage share of GDP: 47 percent in 1995 to 44 percent in 2007.
- Nonregular workers: 30 percent in 2009 from 15 percent in 1995.
- Household property income: about 4 percent of household disposable income in 2007; 20 percent in the United States (2007).
- Public investment expansion: 40 percent (in nominal terms) between 1985 and 1990.
- Personal income tax revenue decline: 1 percentage point of GDP between 1985 and 1995.
- BoJ policy rate: 2.5 percent in February 1987 until May 1989.

_Italic: Source: _wp10293 - Introduction (IMF PDF)._

### 14.      A key reason for low household property income in Japan is the small share of

### 14.      A key reason for low household property income in Japan is the small share of

### Low share of risky assets and implications
- Risky assets (shares, equities, and trusts) account for only 10 percent of the overall financial assets in Japan—significantly lower than the 40 percent share in the U.S.
- Deposits and currency account for nearly 60 percent of financial assets in Japan and have earned a low rate of return over the past decade (typically less than 0.5 percent), depressing household property income.
- Households in the U.S. hold more risky assets than in Japan at all ages (micro data, Figure 4).
- If household property income could rise to the U.S. level in 2007 (14 percent of GDP) through higher investment returns and a higher share of risky assets, GDP could increase by at least 1–2 percentage points assuming MPC of 10–20 percent from household property income.

### Causes of the low share of risky assets in Japan
- Past financial regulations:
  - Until the late 1990s, relatively tight restrictions on investments in risky assets (for example, commercial banks were not allowed to provide trusts or foreign currency deposits to households) likely discouraged holdings of risky assets.
  - Even after most impediments were removed following the “Financial Big Bang” in 1998, households’ risk appetite increased only slightly; moderate adjustment costs (including high fees on trusts) slowed portfolio shifts.
- Lower stock returns and low dividends:
  - Dividend payments in Japan were only 2½ percent of GDP during 2003–2007, compared to 5–10 percent of GDP in other G-5 economies.
  - Stock dividend yields remained lower than 10-year JGB yields throughout the 2000s.
  - Right before the global financial crisis (2007), the dividend payout ratio of nonfinancial corporations rose to about 15 percent, but was still well below the G-7 average (50 percent).
  - Large crossholdings of stocks historically reduced pressure on companies to issue dividends; recent unwinding of crossholdings could support a future pickup in payout ratios.
- Expensive housing:
  - Housing assets were nearly 300 percent of household disposable income in Japan in 2000, compared to about 150 percent in the U.S.
  - Expensive and risky housing purchases may have encouraged accumulation of safe liquid assets and delayed household shifts into risky financial assets until later in life.
- Preferences and risk aversion:
  - Survey evidence suggests Japanese households are more risk-averse than those in the U.S.; 44 percent of Japanese households consider safety in financial investment of utmost importance—more than 15 percentage points higher than in the United States.
  - The collapse of the bubble in the early 1990s may have strengthened risk aversion among Japanese households.

### Does household property income affect private consumption? (micro evidence)
- Empirical approach:
  - Uses Japanese Panel Survey of Consumers (JPSC) micro panel data and estimates a linear Euler equation: ∆Ci,t = β0 + β1∆Pi,t-1 + β2Zi,t + εi,t, where ∆Ci,t is year-on-year change in consumption (September, in percent), ∆Pi,t-1 is annual change in property income in year t-1 (in percent of total income), and Zi,t is a vector of controls (household head’s age, age squared, number of family members, education dummies, occupation dummies, industry dummies, time dummies).
  - Main independent variable is lagged change in property income (∆Pi,t-1) because part of Pi,t-1 was earned after Ci,t-1 was realized and because consumption responses may be sluggish.
- Regression findings:
  - Coefficients on the lagged change in property income are in the range of 0.1–0.2, implying a marginal propensity to consume (MPC) from property income of approximately 10–20 percent (given household consumption is over 90 percent of household total income).
  - Instrumental variable (IV) estimates using ∆Pi,t-2 as an instrument are insignificant but larger than OLS estimates, suggesting OLS estimates (around 0.1) could be interpreted as a lower bound.
  - Estimates require careful interpretation: the model cannot distinguish temporary from permanent changes in property income; estimated MPCs are likely higher than MPC from a temporary increase but lower than MPC from a permanent increase.
- Interpretation and quantitative implication:
  - Using MPC of 10–20 percent, a rise of household property income to U.S. 2007 level (14 percent of GDP) could raise GDP by at least 1–2 percentage points.
  - An increase in the stock dividend payout to the 2007 G-7 average (tripling Japan’s 2007 level) alone could produce 0.5–1 percentage point increase in GDP.

### Debt and equity financing patterns constraining consumption smoothing
- Consumer credit:
  - Outstanding consumer credit in Japan is 10 percent of GDP versus 25 percent of GDP in the U.S.
  - Distribution of credit availability in Japan is concentrated among low-risk and high-risk borrowers, with a “middle-risk” gap—partly due to the lack of a comprehensive credit information system similar to U.S. credit bureaus.
  - Other constraints include households’ strong aversion to consumer credit and stigma attached to borrowing from consumer finance companies.
- Reverse home mortgages:
  - Reverse home mortgage markets virtually do not exist in Japan; many local government initiatives in the 1980s failed to take hold.
  - Barriers include lack of risk management mechanisms, illiquid used housing markets, favorable tax treatment on land encouraging bequests, and low awareness (only 20 percent knew about reverse home mortgages in 2005).
  - Reverse home mortgages could help stimulate consumption among the elderly, but public assistance (for example, insurance to banks through a government-affiliated institution) and measures to deepen used housing markets would likely be needed.

### Policy options and implications
- Boosting wage growth:
  - Service productivity: accelerate labor productivity growth in services (still lagging manufacturing), including further reforms in regulated areas such as health care.
  - Labor market reform: introduce a new regular contract with weaker employment protection to encourage hiring of more regular workers, raise incentives to accumulate human capital, and address equity between regular and nonregular workers; grandfather existing permanent contracts to mitigate uncertainty.
- Raising stock returns and diversifying household portfolios:
  - Deregulation to raise productivity could strengthen profitability and improve stock returns, stimulating demand for risky assets.
  - Continued unwinding of cross-shareholdings could encourage greater dividend payouts and thus private consumption.
  - Extend incentives for holding non-deposit financial assets (for example, the current reduced tax rate on dividend income from listed stocks is 10 percent (reduced from 20 percent) but is scheduled to be terminated at end-2011).
- Improving access to credit or equity financing:
  - Consumer credit: improve access through greater sharing of credit information between banks and nonbanks; note that aggregate impact may be limited since demand for consumer finance is concentrated among low-wealth households.
  - Reverse home mortgages: consider public support to jump-start the market (for example, insurance to banks), and deepen markets for used housing, including developing a qualification system for housing to reduce asymmetric information and help banks sell repossessed homes.

*Source: _wp10293 (chapter content provided).*

### 22.      Finally, steps to strengthen the social security system would help reduce

### _wp10293 - 22.      Finally, steps to strengthen the social security system would help reduce

### Precautionary savings and social security
- Evidence indicates the existence of precautionary savings that stem from concerns about future public pension benefits (Murata (2003)).
- Ongoing reforms to enhance the reliability of the public pension system would lessen uncertainty about households’ future income prospects.
- Efforts to improve the government fiscal positions would also reduce uncertainty and thereby help lower households’ precautionary savings.

### Implications for private consumption and growth
- Reforms to stimulate private consumption hold significant promise for lifting growth in Japan.
- This could be achieved by boosting household disposable income through:
  - higher productivity growth and returns, and
  - steps to facilitate shifts in household balance sheets.
- In particular, the impact of higher household property income on private consumption could potentially be large.

*Source: IMF working paper excerpt.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2010/_wp10293.pdf_