Will the Future Japanese and US Personal Saving Rates be Relatively Equivalent? David W. Campbell * and. Wako Watanabe ** Working Paper N-009

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1 Will the Future Japanese and US Personal Saving Rates be Relatively Equivalent? David W. Campbell * and Wako Watanabe ** Working Paper N-009 Working Paper Series Center for Japan-U.S. Business and Economic Studies The Leonard N. Stern School of Business New York University Second Revision September 2009

2 Will the Future Japanese and US Personal Rates be Relatively Equivalent? *David W. Campbell, Former Visiting Overseas Research Scholar of the Ministry of Public Management, Home Affairs, and Posts and Telecommunications, P. O. Box , Quincy, MA 02269, USA, Tel , **Wako Watanabe, Associate Professor, Faculty of Business and Commerce, Keio University, Mita, Minato-ku, Tokyo , Japan, Tel , Fax: , and HP: We are indebted to Charles Y. Horioka for his superlative comments. Abstract Finally in America it seems that diversity in saving behavior is important in determining aggregate saving. For many years now American and Japanese personal saving behavior have not been all that different so it must be the case that diversity in saving behavior is also important in determining aggregate saving in Japan. 1 There is no such thing as an entrenched and unassailable position...there never has been and I do not believe there ever will be. Chrysler President L. L. Colbert, June 8, 1955 JEL Classification Numbers: C22, E21, O57 Keywords: saving rates, future trends, Japan, US, time-series

3 1. Introduction For many years American and Japanese personal saving rates have been comparatively similar, and from 2001 to 2006 they are roughly identical. Refer to Appendices Tables 1 and 2 and Figures 1 and 2 2. Our question was: Will the future Japanese and US personal saving rates be relatively equivalent? This paper, Campbell (2008), Horioka (1991, 1992), Modigliani (1970, 1990), and Modigliani and Cao (2004) are close related including long-term growth, demographic structure, and inflation. contrastive. To anticipate the main finding, the rates will be With the notable loss of assets in the US from Q we have no doubt that the apex of the US personal saving rate will be 5.94 in 2012, and from 2017 to 2024 the mean difference between the US and Japan rates is percentage points. The Japan paper--the sample periods for Japan are and is organized as follows. The next section provides the model and the estimation results. Then comes future trends in Japan s household saving rate. In the same way, the US paper--the period is only is systematized, and we end with a summary 3.

4 2 Japan s Household Saving Rates 2. Unit Root, Cointegration, Model and Estimation Results In Japan s household saving rates (HSR) of the and periods (blue denotes the former era), the most important issues are growth, per capita real disposable household income (d 1 ) (disposable household income (d 2 )), and population, aged dependency rate (d 4 ) (minor dependency rate (d 5 )). The results of the augmented Dickey-Fuller with one lag and a constant in the test equations are displayed below: ADF(1) T-STAT HSR d 1 (d 2 ) d 4 (d 5 ) level level difference * *** difference ** *** 1 percent, ** 5 percent, * 10 percent, Greene (2008), Table 22.2, p The tests connote that the three series contain an unit root. The level of the ADF(1) T-STAT of the Engle-Granger Test for cointegration with the two explanatory variables was ( ), and the null hypothesis of no cointegration is not rejected (Davidson and MacKinnon (1993), Table 20.2, p. 722, critical values: 1%, -4.29; 5%, -3.74; 10%, -3.45).

5 3 Turning to the regression analysis, the dependent variable and other variables from 1956 to 2006 are: HSR = household saving rate, household saving/disposable household income d 1 = annual rate of change in per capita real disposable household income d 2 d 3 = annual rate of change in disposable household income = inflation, measured as the rate of change in the price deflator for private final consumption expenditure d 4 = aged dependency rate, defined as the ratio of the population aged 70 (65) and over to the working-age population (defined as the population aged 20 to 69 (64)) 4 d 5 = minor dependency rate, defined as the ratio of the population aged 19 and under to the working-age population (defined as the population aged 20 to 69 (64)) 4 d 6 d 7 = national residential urban land price index = business saving rate, business saving/disposable household income A positive and significant coefficient of income growth (d 1 or d 2 ) would support the life cycle hypothesis. Certainly, the direction of impact of inflation is indeterminate. Nonworking

6 (d 4 and d 5 )... tends to reduce national household saving, since 4 it consumes without producing an income. 5 Accordingly, it is likely that both are negative and significant coefficients. Finally, one can assume that the business saving rate is insignificant or negative and significant. We applied OLS (Prais-Winsten). The estimation results in the era of Number 2.2 of Table 1 are per capita real disposable household income, ; disposable household income, ; inflation, ; aged dependency rate, ; and minor dependency rate, In the period of Number 1.1 of the same table the impacts are disposable household income, ; minor dependency rate, ; and business saving rate, All of the coefficients have true signs and are significant. With the outcomes the life cycle hypothesis is congruous. 3. Future Trends in Japan s Household Saving Rate We have confidence that the age structure of the population is the primary determinant in Japan s household saving rate, and one way to build forecasts is to use the estimated regression coefficients (aged and minor dependency rates) and in conjunction with estimates of future population by age group to project future trends in the saving rate. 6 A phenomenal example is Figure 3 7. Our new projections were done exactly the same as

7 5 Campbell (2008), and the techniques and all the new predictions, , are displayed on Table 2 and Figure 4 8,9. On average, household saving rate decreases about 0.96 percentage point every year. America s Personal Saving Rate 4. US Unit Root, Cointegration, Model and Estimation Results In the US saving (PSR) the most cogent points are growth, per capita real disposable household income (e 1 ), and wealth, national home price index (e 7 ). The results of the augmented Dickey-Fuller with one lag and a constant in the test equation are displayed below: ADF(1) T-STAT PSR e 7 e level difference ** *** 1 percent, ** 5 percent, * 10 percent, Greene (2008), Table 22.2, p The tests add up that the three series contain an unit root. The level of the ADF(1) T-STAT of the Engle-Granger Test for cointegration with the two explanatory variables was , and therefore we can not reject the null hypothesis of no cointegration (Davidson and MacKinnon (1993), Table 20.2, p. 722). Note Section 2.

8 6 Switching to the US regression analysis, the dependent variable and other variables from 1983 to 2006 are: PSR = personal saving rate, personal saving/disposable personal income e 1 = annual rate of change in per capita real disposable personal income (five-year moving average) e 2 = annual rate of change in disposable personal income (five-year moving average) e 3 = difference between disposable personal income and e 2 e 4 = inflation, implicit price deflators for personal consumption expenditures e 5 = aged dependency rate, defined as the ratio of the population aged 70 and over to the working-age population (defined as the population aged 20 to 69) 10 e 6 = minor dependency rate, defined as the ratio of the population aged 19 and under to the working-age population (defined as the population aged 20 to 69) 10 e 7 = national home price index A negative and significant coefficient of national home price index (e 7 ) represents that increasing (decreasing) wealth drives personal saving down (up): see Figure 4 and Table 4.

9 7 We performed OLS. The estimation results in Number 3.1 of Table 3 are per capita real disposable personal income (fiveyear moving average), ; disposable personal income (fiveyear moving average), ; difference between disposable personal income and e 2, ; inflation, ; aged dependency rate, ; minor dependency rate, ; and national home price index, Refer to the data of e 1 and e Every one of the coefficients is significant, and the life cycle hypothesis is bolstered. 5. Future Trends in US s and Japan s Personal Saving The US projections were done faithfully the same as Table 2, and the whole predictions, , are presented in Table 4 (also see Appendix Table 3) and Figure 4. On average, from 2009 to 2012 the change of the US personal saving rate is 0.81 percentage point each year, but from 2013 to 2016 the change per year is -0.18, and from 2017 to 2024 each year is From the period of the Japanese negative household saving rate drops around 0.96 percentage point per year, and from 2017 to 2024 the mean difference between the US and Japan rates is percentage points. 6. Conclusion For many years American and Japanese personal saving rates have been comparatively similar, and from 2001 to 2006 they are

10 roughly identical. But from now the US will be unassailable on 8 personal saving vis-a-vis Japan. Further, unfortunately, Japan has substantial challenges--economics (including immigration) and national security; see Appendix Table 3. We do believe that as soon as possible Japan should try to attain the singular net immigration of the United States (For example, Japan should immediately dish out a permanent resident when a person has been in Japan for three years on a lawful visa (all countries including Brazil, Britain, China, Indonesia, North and South Korea, Peru, Philippines, Taiwan, Vietnam, and US).). 13

11 Footnotes 1 Campbell (2004), p. 812, and Campbell and Watanabe (2001). 2 The two personal saving rates are directly comparable; refer to the classic article by Hayashi (1986), and Campbell (2004). 3 The Japanese (US) determinants are trivial from 1956 to 2006 (1959 to 1982 and 1959 to 2006). 4 We prefer as the working-age population from 1982 to 2024 because of the negative rate of the working-age population. 5 Modigliani and Cao (2004), p Horioka (1992), p Refer to Campbell (2004), Table 6 and footnote 9 and Campbell (2008), Table 1 and Section 2. Also we trust that beyond a fifteen-year population projection the trends are insufficient. 8 For a complete methodology, see Horioka (1991, pp ) and Horioka (1992, pp ). Only the sample period of had the estimation results, aged and minor dependency rates, that were required. 9 Further the crux in Table 2 is the colossal surged change of aged dependency rate from to Note Campbell (2008), footnote 14 and Appendix 2.

12 11 Note that e 2 tracks remarkably closely with the personal saving rate: 12 From 2017 to 2024 the pivot in Table 4 is the increased minor dependency rate and the aged dependency rate of the earlier baby boomers (The U.S. Census defines baby boomers as people who were born on 1946 to 1964.). 13 In 2008 the US net migration was 1 (millions). Canada was 187 (thousands), Germany was 100 (thousands), and Japan was zero (thousands) or rounded to zero. Available:

13 Sources Calculated five-year moving averages of Appendices Tables 1 and 2.

14 Sources Appendices Tables 1 and 2

15 Sources Actual Values, Appendix Table 1 Horioka Actual Values Mean SD COV Correlation (Horioka, Actual Values): SD: standard deviation COV: coefficient of variation

16 Sources Tables 2 and 4

17 Table 1 Determinants of Japan s Household Saving Rate, and Coefficient Variable d 0 constant d 1 per capita real disposable household income d 2 disposable household income d 3 inflation d 4 aged dependency rate d 5 minor dependency rate d 6 national residential urban land price index d 7 business saving rate Number Coefficient T-STAT 2-tail R-squared p-value Adjusted R-squared Prais-Winsten d d d d OLS Durbin-Watson statistic (transformed) rho d d d d d d d d d d d d d Durbin-Watson statistic

18 2.3 d d E d Sources d 1 For disposable household income (DHI), see Table 1, Source, and adjusted 68SNA; for inflation, note below. Population is Ministry of Internal Affairs and Communications, Statistics Bureau (2007), Chapter 2, Table 2-1(B). d 3 Cabinet Office (2008 and various), Part 1 FLOW/4(1)/chain-linked method/deflators/calendar Year/CHANGES/private final consumption expenditure. d 4 and d 5 Ministry of Internal Affairs and Communications, Statistics Bureau (2007 and various), Chapter 2, Table 2-8. d 6 Ministry of Internal Affairs and Communications, Statistics Bureau (2007), Chapter 17, Table d 7 Note Campbell s (March 2007) Future Predictions in Japan s Household Saving Rate, Table A-1 and this paper s adjusted 68SNA. Available: http//

19 Table 2 Future Trends in Japan s Household Saving Rate, (% DHI) (1) (2) (3) (4) (5) (6) (7) Year Projected Change in Projected Change in Net Projected value HSR due value of HSR due change value of of AGED a to the MINOR a to the in HSR HSR change in change in AGED b MINOR b Actual Project Notes: a Ministry of Health, Labor, and Welfare (2007). b The projected change in HSR that is due to the change in AGED (MINOR) was calculated by multiplying the projected change in AGED (MINOR) by the coefficient of AGED (MINOR), ( ), of Table 1. For example, on 2007 the projected change in AGED is 0.64 ( = 0.76), and the coefficient of AGED is Multiplying 0.76 by , (3) is (2) and (4), Ministry of Internal Affairs and Communications (2008); 2007(7), Cabinet Office (July 8, 2009)

20 Table 3 Determinants of US Personal Saving Rate, Coefficient Variable e 0 constant e 1 per capita real disposable personal income (fiveyear moving average) e 2 disposable personal income (five-year moving average) e 3 difference between disposable personal income and e 2 e 4 inflation e 5 aged dependency rate e 6 minor dependency rate e 7 national home price index e 8 business saving rate Number Coefficient T-STAT 2-tail R-squared p-value Adjusted R-squared OLS e e E e e e e e E-5 e Durbin-Watson statistic e E e e e e e e e e E-6 e E-5

21 Sources e 1 U.S. Department of Commerce (2009a), Table 2.1, Line 37. e 2 U.S. Department of Commerce (2009a), Table 2.1, Line 39. e 4 U.S. Department of Commerce (2009a), Table 1.6.7, Line 2 (implicit price deflator, personal consumption expenditures (same as Table 1.1.9, Implicit Price Deflators for Gross Domestic Product)). e 5 and e 6 U.S. Department of Commerce (1993, 2001, 2007, and 2009b). e 7 OFHEO (2009), House Prices Indexes (from 1975 U.S. National), and McGraw-Hill Companies (2009), S & P Case-Shiller U.S. National Home Price Index (from 1987).

22 Table 4 Future Trends in US Personal Saving Rate, (% DPI) (1) (2) (3) (4) (5) (6) (7) Year Projected Change in Projected Change in Net Projected value PSR due value of PSR due change value of of AGED a to the MINOR a to the in PSR PSR change in change in AGED b MINOR b Actual Actual Project Notes: a U.S. Department of Commerce (2008). b The projected change in PSR that is due to the change in AGED (MINOR) was calculated by multiplying the projected change in AGED (MINOR) by the coefficient of AGED (MINOR), ( ), of Table 3. For example, on 2010 the projected change in AGED is 0.01 ( = 0.01), and the coefficient of AGED is Multiplying 0.01 by , (3) is (2) and (4), U.S. Department of Commerce (2009b); 2007(7), U.S. Department of Commerce (2009a, from July 31), Table 2.1, Line 34; 2008 uses the same information.

23 2009(7), semiannual 4.6, 09/Q1 4, 09/Q2 5.2, U.S. Department of Commerce (2009a, from July 31), Table 2.1, Line 34. The semiannual rate is 4.6, and we are assuming that the 2009 annual rate will be constant.

24 Appendix Table 1 Japan s Household Saving Rate, , 93SNA (% DHI) Calendar Year Housing Saving Rate

25 Calendar Year Housing Saving Rate Source Cabinet Office (2008 and various). From (93SNA): Disposable Household Income = saving + consumption Consumption = Part 1 FLOW/1(2)/C. Year/Actual final consumption of households Saving = Changes in assets (saving and capital transfer) + reconciliation (historical cost depreciation minus replacement cost depreciation) = Part 1 FLOW/3(4)/C.Y.(1)Nonfinancial/Changes in assets + Part 1 FLOW/3(5)/C.Y.(1)Nonfinancial/Changes in assets + Part 2 Stock/2(4)/(2) Reconciliation c + Part 2 Stock/2(5)/(2) Reconciliation c Saving (2006) = 7, = Consumption (2006) = 341,396.2

26 Saving and Consumption (2006) = 345,209.5 Housing Saving Rate (2006) = Saving/(Saving and Consumption) = 1.10 From (68SNA): The initial household saving rate, 68SNA, is the same as except saving is from Hayashi (1997, pp ). Because the household saving rates 68SNA and 93SNA are quite different I recalibrated the household rate to orange (adjusted 68SNA); the 68SNA household saving rate was multiplied by.8577 (next to the figure). I. 68SNA and 93SNA II. Adjusted Household Saving Rate 68SNA 93SNA

27 average adjusted to.8577 = 11.87/ SNA III. Hayashi (1997, pp ) NNP_BEA SVG_H/NNP_BEA (SVG_H/NNP_BEA)(NNP_BEA)(.01) definition NNP(BEA) household saving rate household saving An example from Hayashi (1997) is: 1970 housing saving = 12.11(63.651)(.01) = trillion yens

28 Appendix Table 2 US Personal Saving Rate, (% DPI) Calendar Year Personal Saving Rate

29 Source U.S. Department of Commerce (2009a, before July 31), Table 2.1, Line 34.

30 Appendix Table 3 Table 1A Population in Japan (in thousands, midyear) Year Population Working Children Senior ~19 70 and over Actual Projections Blue is acme. Change from blue to: Sources Ministry of Internal Affairs and Communications (2008 and various) and Ministry of Health, Labor, and Welfare (2007).

31 Table 1B Population in the US (midyear) Year Population Working Children Senior Net ~19 70 and over Immigration (thousands) Projections Sources Population includes the net immigration. U.S. Department of Commerce, Bureau of Census (2008) National Projections. Available: Table 1C Rankings of Countries by Population Japan US China (No. 1, India) Source U.S. Department of Commerce (2009), Census Bureau, International Data Base (IDB). Available:

32 Table 1D CIA Rank Order-GDP (purchasing power parity), February 3, 2009 Available: Country Comparisons - GDP (purchasing power parity) Home Reference Maps Appendixes Download Datafile Ran k Country GDP (purchasing power parity) Date of Information 1 World $ 69,490,000,000, est. 2 European Union $ 14,820,000,000, est. 3 United States $ 14,290,000,000, est. 4 China $ 7,800,000,000, est. 5 Japan $ 4,348,000,000, est. 6 India $ 3,267,000,000, est. 7 Germany $ 2,863,000,000, est. 8 United Kingdom $ 2,231,000,000, est. 9 Russia $ 2,225,000,000, est. 10 France $ 2,097,000,000, est.

33 11 Brazil $ 1,990,000,000, est. 12 Italy $ 1,821,000,000, est. 13 Mexico $ 1,559,000,000, est. 14 Spain $ 1,378,000,000, est. 15 Canada $ 1,307,000,000, est. 16 Korea, South $ 1,278,000,000, est. 17 Indonesia $ 915,900,000, est. 18 Turkey $ 906,500,000, est.

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