Japan's saving graces - reasons for high personal savings rate

National Review, March 19, 1990

NUMEROUS STUDIES have tried to explain why Japanese households routinely save 15 to 18 per cent of their after-tax income while Americans save only 3 to 5 per cent. Tax incentives are prominently mentioned.

Under the maruyu ("tax free") system, which was in effect for most of the postwar period, interest income from savings accounts was completely tax-exempt and available to savers without limitation. Largely for this reason, the average Japanese household had $66,000 in savings in 1988, about ten times the American average. (By comparison, the Bush Administration's Family Savings Plan would limit the tax exemption to interest on $2,500 of savings each year, and require a seven-year waiting period for withdrawal.) Although a 1988 tax reform limited the maruyu system to individuals 65 or older, the handicapped, and families headed by women, widespread tax evasion reportedly keeps as much as 70 per cent of all Japanese personal savings tax-free.

Capital gains, for years not taxed at all, have been subject to a 20 per cent tax since April 1989. However, investors have the option of waiving the capital-gains tax in favor of paying a 1 per cent tax on the entire transaction. Dividends need not be declared on income-tax returns provided they do not exceed Y500,000 (about $3,500) from a single corporation.

Neither mortgage nor credit-card interest is deductible. Japanese banks normally require mortgage down-payments of 25 to 33 per cent of the purchase price, compared to the 10 to 20 per cent typically required by banks in the United States. Nearly half of Japan's personal savings rate is attributable to home down-payments, according to a McKinsey & Co. analysis.

The impact of Japan's system of lifetime employment is less clear. Other things being equal, one would expect that workers guaranteed a job and predictable salary increases over their entire careers would save less, since the rainy-day motive is largely absent. But the mandatory retirement age for most "lifetime" jobs is 55. Private pensions are usually paid out either as a lump sum or as an annuity lasting for a fixed period, usually about ten years. The resulting uncertainty provides a powerful incentive to save during the working years, as well as to take a second job after "retirement."

Are cultural differences responsible for the savings gap between the U.S. and Japan? This argument conveniently overlooks the fact that high savings rates are relatively new to Japan. During the fifty years prior to World War II, Japan's gross savings rate averaged 11.7 per cent of its GNP, while the comparable figure for the United States was about 19 per cent. Japan's postwar savings boom was motivated by a desire to rebuild the capital stock damaged by the war, and although the savings rate continued rising long after the damage was repaired, it appears to have peaked. Since hitting 23 per cent in 1974, the personal savings rate has drifted downward, reaching 15 per cent in 1988.