Japan: The world’s savers retire

By Diana Farrell, Tim Shavers, Sacha Ghai, Ezra Greenberg, Piotr Kulczakowicz, Carlos Ocampo, Yoav Zeif

Japan is the only developed nation facing an absolute decline, rather than a slowdown, in financial wealth because of demographic trends. To reverse, or even moderate, the projected slowdown, Japan needs to institute broad reforms that generate increased domestic competition and better productivity.

Demographic trends are expected to slow the rate of growth in Japanese household savings and financial wealth accumulation in the coming years, with potentially significant implications for economic growth in Japan and globally. MGI analysis suggests that—absent changes in population trends, savings behavior, or returns on financial assets—the net financial wealth of Japanese households will decline 0.2 percent annually between 2003 and 2024, after increasing 5.5 percent per year between 1975 and 2003. By 2024, this retreat will cause total household net financial wealth to fall nearly ¥ 1,000 trillion (or 47 percent) below what it would been had historical growth rates continued.

The rapid aging of the Japanese population and the dramatic slowdown in population growth are often discussed as important forces that will slow household savings growth. As important, but less widely discussed, are the slowdown in the rate of household formation (implied by the slowing population growth), and the significant differences in saving behavior between younger and older generations.

MGI analysis reveals how these forces build on each other to produce a particularly acute impact on savings and net financial wealth accumulation. New household formation is coming to a standstill, and in twenty years there will be nearly the same number of households available to save as there are today. Of these, there are an increasing number of older households that are moving into the lower saving or non-saving part of their life cycle. The remaining younger households tend to save less and borrow more than older generations at all ages. All of this results in a meager flow of aggregate new savings, and produces an actual decline in aggregate net financial wealth by 2024.

For households, net financial wealth accumulation is a good proxy for economic well-being because it represents the wealth that can be used to support future living standards. For the economy, there will be less household savings to support a fast-growing retiree population and it will become more difficult to support domestic investment and sustain strong economic growth.

Barring an upsurge in economic activity that raises household income, higher economy-wide rates of return, and major savings behavior changes, Japan will, at best, see anemic growth in household financial wealth over the next 20 years. To improve its financial outlook, Japan needs to focus on instituting economic, institutional, and regulatory reforms that can generate increased domestic competition and stronger rates of productivity growth.

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