Japan's financial role in the 1990s - presented by the author at the 32nd Annual Meeting of the National Association of Business Economists, September 23-27, 1990 - International Perspective

Business Economics, Jan, 1991 by Takeshi Ohta

LONG-TERM CONSIDERATIONS

The following are underlying conditions of medium-term concern: narrowing of net savings in terms of I-S balance; an aging population; and a declining savings ratio.

Recent decline in net savings during the period of 1988-89 reflects a sharp increase in corporate investment, which was the result of corporate efforts for survival under the pressures of the strong yen. Corporate investment is expected to maintain the current strong momentum, and it will result in our increase in productivity and competitiveness in the future. Thus it will contribute to an increase in savings in the medium term.

The household sector is unlikely to reduce its savings in a dramatic way. The savings ratio of the household sector declined gradually from 23 percent in the mid-1970s to 15-16 percent in 1989, but it has fluctuated year by year. It is true that the consumption behavior of the general public has changed, but it is yet uncertain whether such change will lead to a decline in the savings rate. What is crucial in this context is the fiscal policy stance of the government. Our government made a commitment to increase the public works expenditures at the SII negotiations with the U.S. Even if the implementation of such a commitment were well managed, it is inevitable that the public sector deficit would increase again.

It is also true that the Japan's population has been aging, but the issue of aging population is unlikely to become a serious problem before the early twenty-first century (in 2030, the share of age group above 64 will be 24 percent).

All in all, a moderate decline in Japan's net savings is expected, but its net savings (external surplus) will not disappear and Japan would maintain its status of capital generating country.

  Savings as a Percent of Nominal GNP
                   Mid-1970s         Mid-1980s          1989
Household              10                9.5             9.3
Corporate             -5                -1              -6.9
Public                -6                 4.5             0.6
External               -                -4               2.0

JAPAN'S FINANCIAL MARKETS

Reflecting Japan's economic development throughout the past two decades, Japan's financial markets and financial system have experienced significant changes. Large domestic net savings have been accumulated, and as a result Japan has become the largest capital generating country in the world. Also, financial and real assets have been accumulated under prolonged easy money conditions. Reflecting these developments, the outstanding financial assets of the domestic nonfinancial sector as a whole have grown at a considerably higher rate than the growth rate of the real economy. Outstanding assets were 3.6 times nominal GNP at the end of 1988, compared with only 1.9 times at the end of 1975.

Against such a background, firms and households have become more sensitive to interest rate fluctuations, and their fundraising and investment activities have diversified. The leverage ratio of the nonfinancial corporate sector fell rather sharply during the past ten years (45 to 35 percent). This is in a sharp contrast to the clearly rising trend of the leverage ratio in the U.S.