Japanese Households’ Financial Asset Allocation: A Critical Study of the Government’s AssetRelocation Policy
（Executive Summary）
This study critically analyzes the Japanese government’s policy to shift households’ financial assets from bank deposits to investmentinstruments. There are three points for discussion; (1) whether U.S. households’ allocation pattern should be used as a benchmark, (2) theeffects of long-term stagnation of the Japanese economy on households’ asset accumulation, and (3) the macroeconomic impact of assetrelocation. Regarding the first point, the financial asset allocation patterns of U.S. households are severely affected by the top 5 percent assetgroup, whose risk-asset ratio is significantly higher than average households. Therefore, great caution should be exercised when using the U.S.allocation pattern, derived from the aggregate household financial assets, as a benchmark for policies aimed at relocating Japanese households’financial assets toward risky assets. Regarding the second point, the growth rate of Japanese households’ financial assets are distinctly lowerthan that of U.S. households. This is mainly owing to long-term stagnation of the Japanese economy and sluggish stock prices. Additionally,the low risk-asset ratio among the Japanese younger generation is not caused by their risk aversion, but mainly because of liquidity constraintsresulting from holding risky nonfinancial assets, such as real estate. Regarding the third point, the corporate sector remains a fund-surplussector in Japan. This implies that its growth is not hampered by liquidity constraints and that shifting households’ bank deposits to risky assetswill not accelerate the Japanese economy’s growth rate. Conversely, as the economy grows faster, households will spontaneously increaseinvestments in risky assets as disposable income increases and liquidity constraints are relaxed.
1.Foreword
Financial assets held by the Japanese household sector in 2022 was US$ 14.9 trillion, or US$ 118,000 per head, which is much less than that ofthe U.S. household sector (US$ 115.5 trillion/US$ 348,000 per head). The asset allocation patterns for both countries are shown in figure 1.
The Japanese Financial Services Agency (FSA), the government’s financial regulation body, and some economists argue that the portfolioallocation of Japanese households is significantly biased toward bank deposits (checking and time deposits) and cash compared to that of U.S.households, citing the data shown in figure 1 as evidence. This figure was published by the Bank of Japan, as a part of the “Flow of FundsStatistics of Japan, the U.S. and the Euro area.”
According to this figure, Japanese households have a lesser share of stocks/investment trusts (Japan=15.7%, U.S.=52.4%) than U.S.households, while majority of financial assets are allocated to bank deposits (Japan=54.3%, U.S.=13.7%). The FSA and some economistscontend that Japanese households must shift their financial assets from bank deposits to stocks and investment trusts based on U.S.households’ asset allocation. The FSA campaign to “shift from bank deposits to investment instruments” began in the late 1990s[1].
Despite the efforts of government and financial institutions, asset relocation toward investment instruments has barely realized in the last 20years. Figure 2 depicts the share of risky assets as a percentage of total financial assets beginning from 1994, a few years from the burst of the“bubble” in 1990?91. Although the risky asset ratio fluctuated as share prices moved, no upward trend was observed during this period.
Several recent studies published in Japan have concluded that the shift from bank deposits to investment instruments has not occurred in thelast 20 years[2].
This study critically analyzes the government’s promotional policy to shift Japanese households’ asset allocations from bank deposits toinvestment instruments by examining data. This study discusses three points; (1) issues related to benchmarking U.S. asset allocation, (2) thenegative effects of the long-term stagnation of the Japanese economy, and (3) the macroeconomic effects of asset relocation.
2. Issues related to benchmarking the U.S. asset allocation
This chapter explains the reasons against using the asset allocation of U.S. households as a benchmark for evaluating that of Japanesehouseholds.
2.1. Problems with using the U.S. asset allocation pattern as a benchmark
First, it is important to note that considering the asset allocation pattern shown in figure 1 as representative of “typical” or “average” familieswould be a misunderstanding. The data used in figure 1 were derived from the flow of funds statistics, which are macroeconomic statisticscapturing financial transactions between major economic sectors in a country, such as the household, corporate, government, and overseassectors, and their balance sheets. Figure 1 shows how each country’s household sector allocated financial assets as a whole. Therefore, theallocation patterns of individual households could differ significantly from those shown in the figure.
In reality, financial asset allocation of individual households is determined by income level, age, asset/liability conditions, and other factors.Therefore, there is no unique optimal allocation pattern suitable for all households. In other words, the U.S. asset allocation pattern for thehousehold sector, shown in figure 1, cannot be considered optimal.
Second, to evaluate the suitability of the allocation pattern of U.S. households, the allocation patterns of other developed countries are shownin figure 3 for comparison. It clearly indicates that the allocation pattern of the U.S. household sector is an outlier compared to those of otherdeveloped countries.
The unique asset allocation pattern in the U.S. is closely related to the uneven distribution of financial assets among households. To verify thisphenomenon, household survey data are available for the U.S. and Japan. Figure 4 displays the outstanding amount of financial assets held byhouseholds, categorized into five (Japan) and four (the U.S.) groups based on the average outstanding amount of financial assets. Thewealthiest Japanese group owns 57 times as many assets as the poorest group’s average, while in the U.S., the wealthiest group holds 240times as many assets as the poorest group, indicating that financial assets are held quite unevenly in the U.S. compared with Japan.
Third, it is a misunderstanding to assume that every household in the U.S. allocates 40% of their financial assets to risky assets. As discussedpreviously, financial assets in the U.S. are significantly unevenly distributed compared to those in other developed countries, including Japan.This also holds true for the distribution of risky assets. Figure 5 illustrates the distribution of stock holdings in both Japan and the U.S.Although the asset class classifications differ between the two countries, the top 20 percent of Japan owns approximately 60 percent of totalshares, while the U.S. top 25 percent holds 96 percent of total stocks.
Similarly, figure 6 shows the percentage of households holding risky assets (stocks and investment trusts) for each country. Although figure 1indicates that the household sector as a whole allocated approximately 40 percent of their assets to stocks, only 15 percent of householdsactually hold stocks. Further, only 10 percent of U.S. households hold investment trusts directly. These findings are consistent with figure 5,indicating that the top 25 percent of the asset size class own almost all stocks.
In Japan, the share of households holding stocks and stock investment trusts is 20.9 percent, which is slightly higher than that of U.S.households (in a Japanese survey, stocks and stock investment trusts cannot be separated). Similarly, the percentage of households holdingtrust investments in Japan is 7.6 percent, which is slightly lower than that of U.S. households. Figure 6 suggests that the share of householdsholding risky assets is at most 20 percent, which appears significantly low than the data in figure 1. The difference between the two figuresindicates that figure 1 illustrates the aggregate data of all households and is significantly influenced by the extremely biased allocation offinancial assets among households[3].
2.2. The degree of risk aversion of Japanese households
Some Japanese economists and policymakers argue that Japanese households are too risk averse. This section assesses whether this statementcan be supported by the data.
The first point to note is that total assets owned by households consist of not only financial assets, but also nonfinancial assets, such as realestate. Real estate value fluctuates widely because of frequent booms and busts in land prices. Additionally, owing to the accounting laws inJapan, the value of houses depreciates swiftly. Therefore, households naturally regard nonfinancial assets as risky, because of the volatility inreal estate value.
Figure 7 illustrates the allocation of total assets (financial and nonfinancial assets) in both countries. Japanese households allocateapproximately 60 percent to nonfinancial assets, while U.S. households’ share of nonfinancial assets is approximately half that of Japanesehouseholds.
If broader risky assets are defined as the sum of risky financial and nonfinancial assets, households in both countries allocate approximately 60?70 percent of their total assets to broader risky assets. In Japan, although the share of risky financial assets is smaller than that of the U.S., theshare of broader risky assets increases to the level of U.S. households because prices of housing and real estate are higher relative to the pricesof other goods in Japan. A significant share of broader risky assets creates liquidity constraints for Japanese households. Therefore,households seem to prioritize holding sufficient liquid assets, such as bank deposits, and to restrain risky assets, such as stocks and investmenttrusts.
Figure 8 shows that as financial asset holdings increase, the share of nonfinancial assets to total assets declines. Therefore, liquidity constraintsare strong among low- to middle-class households, whereas high-class households can allocate significant amounts of risky financial assets asliquidity constraints would not be a concern.
In Japan, households with mortgage payments, which impose liquidity constraints, have lower risk-asset ratios than those without mortgagepayments, as shown in figure 9.
Overall, figures 7 to 9 indicate that when households allocate their financial assets to risky assets, they consider not only the volume of financialassets, but also nonfinancial assets, which are risky assets as well.
Second, prior studies in this field have directly compared the risk aversion of U.S. and Japanese households. One such study was performedby Ito, Takizuka and Fujiwara (2017) who measured risk aversion of both Japanese and U.S. households by questioning participants on thetype of reward they prefer for a certain type of job. Their results show no significant difference between the two countries in terms of their riskaversion. They stated “we cannot conclude that Japanese households are more risk-averse than the U.S.,” and that the difference in risk-assetratio cannot be explained by risk aversion of Japanese households.
3.The effects of long-term stagnation of the Japanese economy
The second point that is examined is the negative effects of the long-term stagnation of the Japanese economy on asset accumulation inJapanese households.
3.1. Stagnation of the Japanese economy
Figure 10 shows the long-term movement of the outstanding amount of financial assets held by Japanese and U.S. households. Owing to dataconstraints, the graph is plotted from 1994. In 2021, U.S. household assets grew 5.5 times compared to 1994, whereas those of Japanincreased only 1.7 times during the same period. What are the main reasons for this large gap between the two countries?
Financial assets are accumulated net savings. Savings on the other hand, is income minus consumption by definition, which suggests that thegrowth rates of financial assets and income are co-related, assuming the savings rate (saving/income) is constant. Figure 11 displays thenominal GDP of both countries as a proxy for household income (year-end 1994=100).
Figure 11 shows the severity of the Japanese economy stagnation. The index for 2021 was 107.1, indicating that the Japanese economy grewby only 7.1 percent in 30 years, or 0.25 percent annually. In contrast, the U.S. economy increased 3.3 times, or 4.4 percent annually. Althoughthe Japanese nominal GDP was significantly affected by Japanese deflation during this period, the large gap in GDP compared to the U.S. musthave had a significant effect on financial asset accumulation in Japan.
Next, figure 12 and 13 include data from the Euro area for comparison. Owing to data constraints, the graphs are plotted from 2003 as thebenchmark, and show that the Euro area figures fall between that of the U.S. and Japan. These graphs also confirm the close relationshipbetween nominal GDP and household financial assets.
Figure 14 illustrates the stock price index movements in both countries as a proxy for the rate of return on risky assets.
The difference in the rates of return between the two countries is evident from figure 14. In case of the U.S., households could easily gainbenefits from holding stocks as stock prices have soared, especially since the 2010s. The U.S. stock prices increased 9.9 times in 2022compared to 1994, while Japanese stock prices rose only 1.3 times during the same period. The base year 1994 was when the Japanese“bubble” had just burst, therefore, stock prices plunged for more than 20 years until finally recovering to 1994 levels in 2017.
The large stock price performance gap, in addition to the difference in the accumulation pace of financial assets, would have a significant effecton households’ attitudes toward risky investments. In the U.S., investing in stocks often resulted in increased stock values, and suchexperiences create a virtuous cycle, in which an increased portion of the asset was invested in additional stocks and other risky assets. Incontrast, Japanese households cannot easily earn capital gains from owning stocks or incur capital losses from them, resulting in a viciouscycle of reluctance to invest in risky assets.
In Japan, low-income growth and falling stock prices have persisted for decades rendering investments in risky assets unworthy. Therefore, it iseconomically unreasonable to ignore the differences in the basic economic and financial conditions of both countries and attempt to inducehouseholds to increase their investments in risky assets. Figure 2 indicates Japanese households’ rational behavior of not relocating financialassets to risky assets during stagnated economic conditions. The Japanese government’s policy priority should be to stimulate economicgrowth to change households’ attitudes toward investments.
3.2. Portfolio balances by age-category
In addition to economic stagnation, another unique feature of the Japanese economy is its aging society and decreasing total population. InJapan, there is often criticism that financial assets are too concentrated among older people. Figure 15 shows that in Japan, individuals over theage of 60 own 56.2 percent of total assets, while in the U.S., individuals over the age of 65 also possesses approximately 50 percent.Therefore, both countries show similar tendencies for older persons possessing approximately half of total assets.
Next, Figure 16 shows that the age distribution of stock holdings, a typical risky asset households would hold, also shows a similar distributionpattern in both countries. The share of individuals over 65 years of age is higher in Japan than in the U.S. In Japan, some critics argue that“older persons hold a larger portion of financial assets, which are allocated heavily in bank deposits. Such large amounts of sleeping assets areone of the main causes of long-term stagnation of the Japanese economy.” However, the data show that aged households hold a significantshare of financial assets not only in Japan, but also in the U.S.; this pattern is consistent with the life-cycle model. The Stock holdings of bothcountries also show similar patterns.
Figure 17 shows the risk-asset ratios of Japanese households classified by age. The ratio is close to zero for those aged below 35 years andincreases to approximately six percent for the 35?44 age group. This ratio gradually increases with age[4]. This pattern shows that despite somecritics’ arguments, aged households are not too conservative to hold only bank deposits. Figure 15?17 indicate that holding risky assetsrequires a certain level of total financial assets and that this condition is met only in those in their 50s and above in Japan.
Figure 18 shows Japanese households’ net savings (gross savings minus liabilities) categorized by age. During the ages of 35?44, net savingsare negative because of relatively small gross savings and a significant amount of liabilities, mostly consisting of housing loans. Given thisfinancial situation, naturally the priority is to avoid investing in risky assets and secure sufficient liquid assets.
As mentioned in section 2.2, holding a substantial amount of housing loans is one of the main reasons for the low risk-asset ratio of theyounger generation in Japan. According to a survey conducted by the Ministry of Land, Infrastructure, Transportation, and Tourism, thepurchase of single-family housing peaks at the age of 41, and the annual mortgage payment amounts to approximately US$ 8900 to US$ 10,000, which is approximately 20 percent of their annual income. Approximately 60 percent of those who participated in the survey respondedthat paying a mortgage is a substantial burden for their family. Figure 19 compares the ratio of disposable income to the outstanding amount ofhousing loans in Japan and the U.S.
The figure shows that in Japan, households’ burden of housing loans is increasing, while that in the U.S. is decreasing. In Japan, disposableincome barely grew during 2013?2022, while the value of housing loans increased. In the U.S., the value of housing loans also increased, butthe growth rate of disposable income was higher than that of housing loans, lowering the ratio. The increased burden of housing loans for theyounger Japanese generation has caused liquidity constraints and restrained investments in risky assets.
3.3. Accumulating financial assets for life after retirement
The last section of this chapter compares the types of financial assets accumulated for life after retirement in Japan and the U.S. In the U.S., themain types of assets for such purposes are defined contribution plans such as 401(k)s and IRAs. The 401(k) commenced in 1981 and theamount outstanding is US$ 18.1 trillion. In Japan, corporate-type defined contribution plan was established in 2001, 20 years after the U.S. Theamount outstanding for all types of DC, including corporate type, is growing swiftly in Japan, but the latest value remains at US$ 0.16 trillion,or one hundredth of the U.S. value. Investment value per person are US$ 34,300 for Japan’s corporate-type DC, and US$ 133,300 for theAmerican DC[5].
Figure 20 and 21 show the purpose for holding financial assets categorized by age. Households in both countries show a similar pattern, wherein their 20s and 30s, priority is placed on expenditures for housing and children’s education, while preparing for retirement gradually increasesand becomes a top priority after the age of 40 and beyond.
Figure 22 depicts the results obtained from surveying Japanese households regarding the criteria for choosing their financial products.Profitability is the first choice for the younger generations. However, as the age category rises, their priority changes to asset safety rather thanprofitability. This pattern is consistent with the life-cycle theory. Younger generations prioritizing profitability is also consistent with theaccumulation of retirement assets. The contradiction between figure 17, in which younger generations show a low risk-asset ratio, and figure 22,in which they prefer profitable financial assets, could be explained by liquidity constraints.
4.Macroeconomic effects of shifting financial assets
This chapter discusses the third point; how the shift of financial assets from bank deposits to investment instruments, affects the macroeconomy. Usually, households are considered a fund-surplus sector and funds are provided to fund-shortage sectors, such as the governmentor corporations, via indirect financing through banks or direct financing through capital markets. Some Japanese critics argue that “to revive theJapanese economy, financial assets accumulated by households should be utilized.” Their argument could be interpreted as “Japanesehouseholds’ 1,000 trillion yen of bank deposits bear little interest rates and are lying dormant in banks. Such funds should be invested ingrowing industries, including venture companies, to revive the Japanese economy.” This chapter discusses several issues related to thisstatement.
First, the Japanese corporate sector is not constrained by fund shortage. Figure 23 shows the lending attitudes of Japanese financial institutions.After the global financial crisis, lending attitudes continued to be relaxed and the corporate sector as a whole was not facing liquidityconstraints.
Second, in a normal economy, nonfinancial corporations require funds for fixed investments, such as increasing production capacity orconstructing new buildings. If internal funds are insufficient for such investments, they must rely on bank lending or the issuance of new stocksand/or corporate bonds. However, figure 24 shows that the Japanese corporate sector, as a whole, has been a fund-surplus sector for morethan two decades. Fund surplus in the corporate sector implies either a lack of investment opportunities to expand business operations andimprove productivity or corporate managers are too risk-averse and reluctant to invest. Either way, it is one of the main reasons for the long-term stagnation of the Japanese economy.
Under such circumstances, a household’s direct purchase of newly issued stocks has little effect on stimulating fixed investments. The numberof stocks newly issued by listed companies was US$ 957 million in 2022, and the five-year-average was US$ 4,226 million. As the total amountof nominal fixed investments in fiscal year 2022 was US$ 715 billion, even if households purchased all newly issued stocks, it constitutes only0.6 percent of total investments. Meanwhile, purchasing stocks from stock markets has little effect on corporate funding, except that stockprices may rise with increased trading.
Third, it is often said in Japan that “to stimulate the economy, providing risk money from the household sector to growing companies,including venture companies, are necessary.” The amount of investments in start-up companies in Japan was only US$ 4.3 billion in 2020,whereas that in the U.S. was US$ 143 billion. However, the amount in Germany is US$ 5.6 billion, which is marginally greater than that inJapan. This suggests that the U.S. fund-supplying system has developed outstandingly, rather than the amount in Japan being too small.Additionally, investing directly in venture companies or capital requires professional knowledge that cannot be handled by households.
Fourth, how is the Investment-Savings (IS) balance affected by government policies that shift household funds to risky assets? Figure 24indicates that the corporate sector continues to be a fund-surplus sector, whereas the government sector is running a huge deficit financed byissuing government bonds. Currently, approximately 90 percent of government bonds are held by financial institutions, including the centralbank.
It is widely known that IS balance holds only ex-post. As a thought experiment, if a significant amount of household bank deposits were toflow into risky assets, then as financial institutions lose deposits, they are forced to sell government bonds. This could cause a decrease inbond prices (increase in interest rates), and if the central bank tries to stabilize interest rates, it must conduct security purchasing marketoperations. This results in a shift in government bonds from private financial institutions to the central bank. If the central bank does notintervene in the bond market, rising interest rates will exert downward pressure on business activities. Additionally, as the above discussionimplies, even if households purchase all newly issued stocks, the stimulating effects on productivity or economic growth rates seem to bemarginal. Therefore, it seems unlikely that shifting household financial assets as a starting point for government policy will succeed in changingthe IS balance toward a more growth-oriented pattern[6].
The current combination of the fund-surplus corporate sector and government deficits results from the response of individual sectors to long-term economic stagnation. Therefore, judging from the IS balance, it seems unlikely that the relocation of households’ financial assets alonecould increase economic growth. Conversely, economic theory predicts a causality of “economic growth → household asset relocation,” andnot vice versa, as advocated by the government. As discussed under the Chapter 3, if the Japanese economy succeeds in increasing economicor productivity growth, disposable income of households would also increase. Consequently, younger generations would increase the purchaseof risky assets, as liquidity constraints would be relaxed. This causality may be more convincing than the reverse scenario.
5.Conclusion
This study critically analyzed the Japanese government’s policy of shifting households’ financial assets from bank deposits to investmentinstruments. There were three points for discussion; first, whether to use the U.S. households’ allocation pattern as a benchmark, second, theeffects of long-term stagnation of the Japanese economy on the asset accumulation of households, and third, the macroeconomic impact ofasset relocation.
Regarding the first point, the financial asset allocation of U.S. households is extremely biased toward the top 5 percent wealthiest group, whoserisk-asset ratio is outstandingly high. Therefore, care should be taken when using the U.S. allocation pattern derived from aggregate householdfinancial assets as a benchmark for policies to relocate Japanese households’ financial assets toward risky assets.
Regarding the second point, the growth rate of Japanese households’ financial assets is distinctly lower than that of U.S. households. This wasprimarily because of the long-term stagnation of the Japanese economy and sluggish stock prices. Additionally, the younger Japanesegeneration’s low risk-asset ratio is not caused by their risk aversion, but mainly by liquidity constraints imposed by risky nonfinancial assets,such as real estate.
Regarding the third point, the corporate sector remains a fund-surplus sector in Japan. This implies that liquidity constraints do not hamper itsgrowth, and that shifting households’ bank deposits to risky assets will not accelerate the growth rate of the Japanese economy. Conversely, ifthe economy starts to grow faster, households will spontaneously increase investments in risky assets as rising disposable income and relaxedliquidity constraints are realized.
There are other points of discussion that are not addressed in this study. The first is the entry cost associated with starting investments. Theentry cost for Japanese consumers includes a sound level of financial literacy, further structural refinement of DC plans and other financialproducts, and improvement in the trustworthiness of financial institutions. Currently, the Japanese FSA is planning or engaging in variouspolicies to lower the entry cost for investments, including improving financial literacy, the structural renewal of the Nippon Individual SavingsAccount, a personal-type defined contribution plan, and the establishment of an independent financial adviser system.
Another point for discussion is that the rising inflation rates in Japan, starting from 2022, lowered the real interest rates of banking deposits tonegative territory, as the nominal deposit rate was very close to zero percent. The significant changes in the relative profitability of majorfinancial instruments, not seen for decades, may have caused spontaneous asset relocation by Japanese households.
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