Why Did Japan's Household Savings Rate Fall in the 1990s?

Abstract

This paper investigates empirically why Japan's household savings rate fell in the 1990s. We constructed an economic model consisting of two types of household: unconstrained life-cycle households and liquidity-constrained households. Unconstrained households generally save, but liquidity-constrained households consume all of their disposable income. We found that the proportion of liquidity-constrained households increased sharply in the late 1990s, which led to a decline in Japan's household savings rate. Our simulation analysis demonstrated that if the proportion of liquidity-constrained households in the 1990s had stayed at the level as that of the late 1980s, the household savings rate would have increased by four percent points in 2001 and 2002.

Keywords: Household saving rate, Life cycle theory, Liquidity constraint and Aging

JEL Classification: D11, D12, D31, E21